Public Bill Committee

[Mr David Amess in the Chair]

(Except clauses 1, 3, 16, 183, 184 and 200 to 212, schedules 3 and 41 and certain new clauses and new schedules) - Clause 91  - Charge to tax

Amendment proposed (this day): 15, in clause91,page54, line2,at end add—
‘(10) The Treasury shall within three months of Royal Assent of this Act publish an assessment of the impact of the charge to tax in this section if subsection (2)(b) did not apply.’.—(Catherine McKinnell.)

Question again proposed, That the amendment be made.

David Amess: I remind the Committee that with this we are discussing the following:
Clauses 91 to 106 stand part.
Government amendments 70 and 71.
Clauses 107 and 108 stand part.
Government amendment 73.
Clauses 109 to 113 stand part.
Government amendments 74 to 76.
Clause 114 stand part.
Government amendments 77 to 79.
Clauses 115 to 129 stand part.
Government amendment 80.
Clauses 130 to 133 stand part.
Government amendment 81.
Clauses 134 to 147 stand part.
Government amendments 82 to 85.
Clause 148 stand part.
Government amendments 86 to 91.
Clauses 149 and 150 stand part.
Motion to transfer clause 150.
Clauses 151 to 160 stand part.
Government amendments 95 to 100.
That schedule 31 be the Thirty-first schedule to the Bill.
Government amendment 92.
Clauses 161 and 162 stand part.
Government amendments 101 and 102.
That schedule 32 be the Thirty-second schedule to the Bill.
Clauses 163 to 166 stand part.
That schedule 33 be the Thirty-third schedule to the Bill.
Government amendments 93 and 94.
Clauses 167 to 172 stand part.

David Gauke: It is a great pleasure to welcome you back to the Chair this afternoon, Mr Amess, and to respond to the thorough—some might say lengthy—debate that we had this morning. I welcome back those hon. Members who have returned after lunch.
As we heard, clauses 91 to 172 and schedules 31 to 33 introduce the annual tax on enveloped dwellings, or ATED, which is an annual charge on residential properties valued at more than £2 million owned by certain non-natural persons, which is a term that encompasses companies, partnerships that include a company member and collective investment schemes. For brevity during the debate, which could do with some brevity, I will generally use the term “companies” as shorthand to describe non-natural persons.
If I may, I will now provide an overview of the tax and its background. It is the will of Parliament that stamp duty land tax is paid on transactions of land. While the majority of people pay their property taxes, some try to avoid paying their share. The Government are determined to address that and to ensure that those who own residential properties in Britain pay their fair share.
Enveloping describes a process by which a property is placed into a company, often as its only asset. The property can then effectively be transferred to another owner by selling the shares of that company and such a transaction would not be subject to stamp duty land tax.
Her Majesty’s Revenue and Customs estimates that the stock of enveloped residential properties valued at more than £2 million in 2011-12 was more than 5,000. About 300 further properties were enveloped during 2011. Research published in April 2012 by the estate agent Savills, to which the hon. Member for Newcastle upon Tyne North referred, indicates that some 12% of sales of £2 million-plus residential properties are effected at share level or involve a company as vendor or purchaser. That is a high-profile form of tax avoidance that creates a cost to the Exchequer and needs to be addressed to maintain the long-term credibility of stamp duty land tax. I remind the Committee that that is the purpose behind the provisions before us.
Let me now set out what action the Government have taken. We announced at Budget 2012 a package of measures to tackle tax avoidance, including the wrapping of property in corporate and other envelopes, and to ensure that non-natural persons holding high-value dwellings pay their fair share. The package included the introduction of a 15% rate of stamp duty land tax on residential property valued over £2 million for companies other than property developers with a two-year track record, the introduction of an annual charge on enveloped properties and the extension of the capital gains tax regime to disposals of high-value property by non-UK residents.
We consulted on the changes during 2012 and 2013 and the legislation before us today is the outcome of much discussion and consultation with interested parties. Indeed, the Chartered Institute of Taxation commented that the Finance Bill’s
“draft clauses have benefitted considerably from the well-managed consultation process to frame reliefs from both ARPT and the higher rate of SDLT that will take genuine businesses out of the scope of the charges.”
I will now outline how the new tax will work. It is introduced with effect from 1 April 2013 and each chargeable period runs for a year. The first tax return in the first year of operation of the tax will be due on 1 October 2013, rather than 30 April—as will be the case in subsequent years, with payment of the tax in the first year by 31 October 2013. The amount of tax due will be determined by the value of the property, with four bands ranging from £15,000 for properties valued at more than £2 million, but not more than £5 million, up to £140,000 for properties at valued at more than £20 million. If the property were within the scope of the charge for only part of the year, the tax would be reduced proportionately.
The amount of tax chargeable under each band will be uprated each year by the value of the consumer price index in September of that year. The provisions contain reliefs and exemptions to exempt genuine businesses that hold their properties in structures within the scope of the tax but do so solely for commercial reasons, including property rental and development businesses, properties opened to the public, farmhouses, charitable companies, and public and national bodies.
The hon. Member for Newcastle upon Tyne North went through the various clauses and I do not intend to repeat that process, but I am grateful for her thorough explanation of the provisions. I shall, of course, turn to the various questions that she asked in respect of them. However, before doing so, I draw attention to amendment 15 to clause 91 tabled by Opposition Members. It would require the Treasury to
“publish an assessment of the impact of the charge to tax in this section if subsection (2)(b) does not apply”
within three months of Royal Assent of the Finance Bill. Essentially, subsection (2)(b) applies the tax to a company, partnership or collective investment scheme. The amendment’s intentions are clear. The Opposition believe that, by not applying subsection (2)(b), the annual tax on enveloped dwellings would turn into a mansion tax.
As for (2)(b) or not (2)(b)—that is the question—it is better to suffer 2(b) than not. [Laughter.] Opposition Members are asking for an assessment of the impact of the mansion tax rather than explicitly for the introduction of a mansion tax, but they have given us an opportunity to discuss the matter a little. An amendment to introduce a mansion tax would widen the scope of the tax and would therefore be excluded from being debated in Committee. However, asking for an assessment does not change the scope of the tax, but allows the Opposition to raise the issue.
We reject the amendment. Introducing a mansion tax has been debated twice. The Government are clear about their position, and the matter does not need to be debated again. In Committee of the whole House, we expressed our real worries about the introduction of a mansion tax. One third of properties in London worth more than £2 million have been in the same ownership for more than 10 years. As such, a mansion tax could hit asset-rich but potentially income-poor households. A family could live in a house worth £2 million, but have a £1.6 million mortgage. That would mean that its net wealth would be £400,000 and the family could not easily afford a mansion tax. A mansion tax would be administratively burdensome for HMRC to operate at a cost to taxpayers, not to mention intrusive for those having their homes inspected. I shall turn in detail to the distinction between a broader mansion tax and the measure that we are discussing later in my remarks.

Chris Evans: The Minister cites the example of a £1.6 million mortgage—a huge sum. The mortgage income multiplier is roughly three-and-a-half times someone’s wages and, as a former financial adviser, I know that to secure such a mortgage a person would have to be earning a six-figure salary. A mansion tax of 1% a year would be affordable in that instance. To refer to only £400,000 is a little simplistic. Does the Minister agree?

David Gauke: No, I do not. We heard from the hon. Member for Newcastle upon Tyne North that the Opposition would have a mansion tax that would raise £2 billion to fund the reintroduction of the 10p rate of income tax—I appreciate that the Opposition’s policy on the 10p tax rate tends to move around a little, but that is their current policy. We must bear in mind that, according to the most up-to-date assessment we have, 55,000 properties are worth more than £2 million. If a mansion tax were to raise £2 billion a year, the average contribution for each one of those properties would be just over £36,000 a year. That strikes me as a fairly significant sum of money, given that the vast majority of properties worth more than £2 million are in fact only just worth more than that—they tend to be clustered more towards the lower end of that price range. The sum involved is significant and makes some Government Members think that if the intention really is to raise £2 billion a year, the threshold will have to be significantly lower than a £2 million value for a property and the mansion tax will very rapidly become a homes tax.

Fiona O'Donnell: Households in my constituency have been told they will have to move out of their houses because they have an unoccupied bedroom. Will the Minister help me to explain to those households that it is not okay to say to someone living in a house with a value of over £2 million that they need to do their bit to bring down the deficit as well?

David Gauke: I take it from the hon. Lady’s intervention that she is happy to support a rate of £36,000 a year for a home worth £2 million. Perhaps she is, but the point I would make is that she should look at what the Government are doing across the board to ensure that the wealthy pay their fair share. Indeed, the biggest contribution towards deficit reduction is coming from the wealthiest.

Sheryll Murray: Does my hon. Friend agree that the comparison made by the hon. Member for East Lothian is not a good one? The constituents to whom she referred are in social housing; if somebody owned a house with an extra bedroom that they could not afford, they would sell their house and downsize.

David Gauke: They are two very different matters: one concerns the spare room subsidy, the other would be a substantial charge on properties owned by individuals. There is also the question of whether, given their supposed interest in controlling welfare spending, the Opposition maintain the position that they would reverse the spare room subsidy changes the Government have made.

Marcus Jones: My hon. Friend is putting forward a very interesting argument against what the Opposition propose. Does he agree that those proposals are a Trojan horse and are probably the prelude to a future council tax revaluation? Many of our constituents would have to pay more council tax if the Opposition were in government.

David Gauke: My hon. Friend makes a very good point. As I have said, given the Opposition’s ambitious target of raising £2 billion and the relatively small number of properties worth more than £2 million, one cannot help feeling that the base would be broad; to coin a phrase, this is a policy for the many, not the few. My hon. Friend is right to raise concerns about that.
We are already taking steps to ensure that the wealthy pay their fair share, as I said a moment ago. That is why we have introduced the 5% and 7% rate of stamp duty land tax. Anyone purchasing a new home costing £2 million or more has to pay stamp duty land tax at 7%.
In addition, the amendment does not achieve the result that the Opposition would like it to. Further changes to the legislation would be required, for example, to clause 93, which provides rules for the person liable to the charge—rules only for the named non-natural persons. It does not provide that an individual should be a chargeable person. There would therefore appear to be a charge to tax, but no one who was liable.
Difficulty would also arise in other areas of the legislation. For example, clauses 106 and 107 would not operate properly. Not applying subsection (2)(b) of clause 91 would not turn ATED into a mansion tax, as the Opposition wish, so an assessment of the impact of the charge to tax under the condition would be fruitless. For all those reasons and because of our fundamental position on the matter, we do not support the amendment. I will certainly ask the Opposition to withdraw it. Indeed, I shall give the hon. Member for Newcastle upon Tyne North an opportunity to do so now.

Catherine McKinnell: I appreciate the technical points that the Minister makes, but the whole point of the review is to assess the impact as though subsection (2)(b) or not (2)(b) would not apply and therefore it would take into consideration the technicalities that he refers to, which would need to be adjusted in order to ensure it applied properly. It does not take away the fact that it is asking for a basic assessment of the impact of applying the charge to individuals in the same way that the Government are proposing to apply it to enveloped dwellings. I appreciate that there is a policy difference between the Government and the Opposition on this issue, but the Government cannot hide behind technical reasons to oppose the amendment.

David Gauke: There are technical difficulties with the amendment. If I were to be generous to the hon. Lady, I would say that she is right to say that any review would no doubt highlight all the technical difficulties. None the less, it does not quite do what the Opposition want it to do. I appreciate that she spoke to the clause and amendment at short notice. She may want to raise her concerns with her hon. Friend the Member for Nottingham East, who failed to pick up those points in other clauses. That is something that we would certainly not have expected from the hon. Lady. However, let me not try to stir up difficulty on the Opposition Front Bench.
The hon. Lady is right to say there is a difference of view with regard to the mansion tax. In 13 years, the Labour party never introduced any proposals for such a tax and showed no enthusiasm for it for some time after the general election. Indeed, we have had an indication that there was no enthusiasm for it during coalition negotiations. I am still interested to know whether the Opposition are comfortable with a rate of £36,000 a year for every property worth more than £2 million, because that, on a quick calculation, is what it would cost. That seems to me a very significant cost indeed.
Turning to Government amendments 70 to 102, there are a series of minor, technical amendments to the legislation: amendments 81 and 92 to 102. Drafting changes will clarify the intention of the legislation and remove any potential cause for confusion. I do not intend to go through them line by line.
There are two sets of more substantial Government amendments that I will describe in a little more detail. Amendments 70 to 72 adjust the aggregation of interest rules in clauses 107 and 108, and amendments 73 to 80 and 82 to 91 adjust the relief from ATED for charities outlined in clauses 148 and 149.
Along with the removal of clause 108, the amendments to clause 107 make changes to prevent any separate interests held by an individual in a dwelling from being aggregated with an interest held by a connected company, if the taxable value of the interest held by that company is not more than £500,000. That will further target the ATED only at circumstances where tax avoidance is a risk, and will exclude cases where a connected company owns an interest in land worth comparatively little for genuine reasons, such as to satisfy a third-party landlord’s requirements. Those changes will allow the policy objective of the tax to be better met.
In response to representations from charities, I have also tabled more substantial amendments in relation to one of the reliefs from the ATED charges: the rules relating to charitable companies relief. The rules in clauses 148 and 149 currently refer to the substantial donors legislation used elsewhere to prevent abuse of income tax relief for charitable donations. That legislation is being prospectively repealed or replaced by rules in schedule 3 of the Finance Act 2011, which are known as the tainted donations rules. They are targeted at ensuring that tax relief cannot be claimed by the donor where the donation gives rise to a financial benefit to the donor. The first set of amendments will therefore base the anti-avoidance provisions in the charitable companies relief on the new tainted donations rules, instead of on the old substantial donors rules.

Stephen Doughty: Will the Minister give some clarification about who from the charitable sector made representations to him? As he will know, I used to work in the charitable sector and previously have worked on many of these issues, so I was wondering whether he had heard from across the sector, from sector-wide bodies, or from a particular group of charities.

David Gauke: I am grateful to the hon. Gentleman for his question and I am keen to give him an accurate and precise answer, or an indication, at least. While addressing other points, if I may, I shall think deeply to see whether I can recall the exact details to respond to his excellent question.
Clauses 148 and 149 concern the nature of any arrangements between the charitable company and the person making the gift to allow that person or an associate to occupy the property. Where the gift and the arrangements would not have been entered into independently of one another, the gift is potentially tainted. Where that occurs, the charitable company will come within the scope of ATED.
We are aware that some properties are genuinely donated to a charity on the condition that the donor or the donor’s family will be allowed to continue to occupy the property. The family’s presence often adds to the historic significance and setting of the property, and they may facilitate public access by opening the property.
To allow the tax to be better targeted, the second set of amendments will allow the relief for charities to be claimed if, in such a situation, the property or its gardens are normally open to the public for at least 28 days per year, and that is on a commercial basis or for charitable purposes. The amendments are intended to ensure that the right balance is struck between the need to protect ATED from potential abuse and the need to protect charitable companies from unnecessary or potentially onerous obligations. For that reason, the final change to the legislation will be to change the provision from being a relief, which needs to be claimed annually, to an exemption. The effect of this will be that charitable companies will not need to file returns except where they are within the anti-avoidance rules.
Given that I have set out the amendments we have tabled as a consequence of representations received from the charitable sector, let me respond to the question raised about where some of those representations came from. They included the National Trust—I should declare an interest as a member; Stewardship, a conglomerate of charities; the Wellcome Trust; and representations through HMRC’s charity tax forum. Therefore, a broad range of charities raised those issues.
Let me turn to some of the points raised in debate. I touched earlier on administration, in particular the comparison made with the mansion tax. With regard to the ATED, there are around 5,000 enveloped properties above £2 million a year. About 1,000 of those are likely to be liable to the tax. That compares with 55,000 properties in the UK valued at or over £2 million. Immediately we can see that there is a difference in scale of administrative challenges.
The ATED takes a self-assessment approach. We believe that is the appropriate approach given the number of properties involved. HMRC can then take a risk-based approach to checking those. If all properties over £2 million were included, there would be a much stronger need for a formal valuation process by the Valuation Office Agency.
A valuation exercise by the VOA would cost around £10 million and take about 24 months, with further ongoing costs of around £2 million per annum. It would be extremely complicated because, at the high end of the market, the evidence of comparable transactions is limited. The specific characteristics of a property could have a significant impact on the valuation.
The set-up costs for HMRC in year one are in the region of £700,000, to establish IT support and returns, plus £500,000 to £1 million in year one for VOA costs, with an annual running cost of about £400,000, which is a small percentage of the revenue that is to be raised.
The hon. Member for Newcastle upon Tyne North asked how advanced the process is. I understand that HMRC believes it is on track for delivery of this tax and the first returns by 1 October. It will be staffed to assist queries, now and over the introductory period. As the impact is limited, the number of staff needed will be small.
The hon. Lady asked why very expensive properties are charged at a lower rate measured against the value of the property. We believe the charges are sufficient, with the 15% SDLT rate, to discourage enveloping. We must remember that that is the purpose of the legislation.
I was asked who will do the valuations, how many would be done and whether the VOA is staffed appropriately to deal with it. I will provide comfort to hon. Members by saying that the VOA is adequately staffed. I have run through the costs, many of which are set-up costs, not annual costs. The valuations will focus on boundaries and those properties that may be close to falling outside ATED or moving into a different band. At this stage, it is not possible to say how many properties will fall into each charge band. We will know that with sufficient confidence only once the legislation is in place.
As for why we set the bands where we have, I come back to the rationale behind these clauses: to discourage SDLT avoidance. Given that it is not possible to identify how many properties will be in each band, we cannot make a specific estimate of how much will be raised from each band or type of corporate persons; that will not be available until we get the first returns in.
I was asked whether there were ways in which ATED could be avoided, for example, by de-enveloping or by using a trust structure instead. It is worth reiterating that if a property is taken out of an envelope, ATED has achieved its purpose; that is what we seek to address. Trusts have been excluded from the scope of ATED as the sale of interest in trusts is rare and complex. If it becomes apparent that there is exploitation of trusts for the purpose of disposing of high-value property, the Government will address that.
A point was raised with regard to partnerships, the Chartered Institute of Taxation’s comment on the portability of interests and whether clause 165 overrides case law, with a partner potentially being taxed on the full value of interests, and what the intention is on charging partnerships. The legislation was amended in response to the CIOT’s comments. It is clear that partners have a beneficial interest and the legislation is clearly intended to catch those situations. On the question of capital or full share, it is the intention to charge the partnership on the property irrespective of the capital share of individual corporate partners. It is important to note, however, that most partnerships carry out a genuine business and will benefit from the available reliefs.
A question was asked about uprating under CPI. We believe that it is fair that the amount payable is uprated by CPI, the usual measure for uprating in the tax system. Otherwise, in real terms, those paying the tax would be paying less than they did in the previous year, which would be at odds with the aim to discourage the holding of property in envelopes. As to why there will be no increase in the bands by property index, it is correct to say that the thresholds will not be uprated annually. That is for reasons of simplicity. Otherwise, valuations would need to become more frequent, which would increase the administrative burden. There are real advantages to having clear boundaries on rounded numbers.
I turn to the questions on reliefs. On how many businesses will be impacted by those, as I said earlier we estimate that about 5,000 will be within the charge but 4,000 will be relievable. Therefore, 1,000 will pay and the other 4,000 can make use of interim relief.
In terms of double tax relief, whether ATED will be eligible and whether relief from income tax will be given on money remitted to the UK to pay the charge under the remittance basis, there are no provisions to relieve tax levied by any overseas fiscal authority. This is a tax on UK property. The remittance basis of tax provides a generous allowance and the Government have no intention of increasing that.
To return to administration, on the question about how much the ATED helpline cost and whether it is ready for first returns or whether additional staff will be needed, advice has already been given to the public in relation to that. The staff are in place for processing the returns, which will number about 5,000 and be managed as business as usual by that unit. The cost of running the phone line is included in the overall numbers I have already given.
As for how mixed-use properties will be treated and who will determine whether a property is suitable for use, in the Harley street example, it is highly likely that business rates will be paid for the commercial part, with the residential part designated as such by the council. A property that is used for business and cannot be occupied as a residence due to planning law will not be deemed suitable for use as a dwelling. Whether a property is suitable for use is a question of fact to be determined by the tax tribunal, and HMRC will publish guidance on that.
A question was raised about the impact across the country. It is true that the regional impacts were not set out in the tax information impact note. Some properties in rural areas that meet the ownership conditions will be within the charge, but we anticipate that the majority of returns will come from London and the south-east, reflecting the national distribution of high-value properties.
On historic houses and the concern that the relief is too generous, the relief requires the property to be run on a commercial basis. Charging an impossibly high fee to visit or not advertising appropriately is not commercial. Therefore, a property in those circumstances will not be eligible for relief. HMRC will take a risk-based enforcement approach to ensure that the relief is not abused.
There was a question about clause 110, and about where the definitions—for example, the meaning of dwelling—can be found. HMRC will provide guidance by the end of July, before Royal Assent. A question was asked about what happens if a company holding the property has no income or funds to pay the charge. If the company does not have available funds, then in the absence of money being put into the company, HMRC will take robust collection action, and the people who own the company would need to decide what to do, as per any normal company debt.
As for the questions about whether one group files returns and about groups with multiple properties, each company in a group needs to file its own returns. Where a relief is claimed, a single return can be made per return by each company. Where there is a liability to make a payment, one return per property is required. In terms of the administrative burden, the Government believe that the five-year system of revaluation will limit the potential burdens, but new returns will be required from a small number of taxpayers.
The amendments are intended to ensure that the right balance is struck with ATED. The annual tax on enveloped dwellings is a tightly drawn tax with specific purposes. It will counter the avoidance of stamp duty land tax, which was allowed to go on for too long by the previous Government. It will ensure that those who own high-value residential property in a contrived fashion pay their fair share of tax. We have undertaken extensive consultation on the tax and responded to concerns about how it will affect genuine businesses.
I hope that my overview of the new tax and the clauses is helpful to the Committee. I urge the Committee to reject Opposition amendment 15, and I hope that clauses 91 to 172 and schedules 31 to 33, as amended by Government amendments 70 to 102, stand part of the Bill.

Catherine McKinnell: I thank the Minister for his comprehensive reply to our comprehensive debate. However, we are not convinced that all the issues that we want to see explored have been covered, such as how the ATED tax could be extended to apply to residential and individual properties, as well as the enveloped dwellings that are already included in the measure. We have two Liberal Democrats in the Committee who will, I assume, be able to support the measure. Our proposal would enable the Government properly to explore the possibility of a mansion tax. We will press the amendment to a vote, because we want them to look seriously at the matter and decide, using the resources that they have available, whether this might be a way to pay down the deficit and contribute to a fairer tax system.

Question put, That the amendment be made.

The Committee divided: Ayes 11, Noes 16.

Question accordingly negatived.

David Amess: We now have quite a lengthy procedure to go through. We will put the questions necessary to dispose of the remaining amendments, clauses and schedules in part 3 of the Bill. I propose to deal with amendments to the same clause together, and to deal with consecutive clauses or schedules with no intervening amendments together. I shall, however, take clause 108 stand part separately, because the Government propose to remove the clause. If any hon. Member requires a separate Division on any other clause or schedule, or on any amendment, will they please let me know?

Clause 91 ordered to stand part of the Bill.

Clauses 92 to 106 ordered to stand part of the Bill.

Clause 107  - Interests held by connected persons

Amendments made: 70, in clause107,page63,line8,at end insert—
‘(1A) This subsection provides for an exception to subsection (1).
Where P is an individual, C is not treated on the day in question as entitled to P’s single-dwelling interest unless on that day C is entitled to a single-dwelling interest in the dwelling that is a freehold or leasehold interest with a taxable value of more than £500,000.’.
Amendment 71, in clause107,page63,line36,at end insert—
‘(6) In the application of this section to Scotland—
(a) the reference to a freehold interest is to the interest of the owner;
(b) the reference to a leasehold interest is to a tenant’s right over or interest in property subject to a lease.’.—(Mr Gauke.)

Clause 107, as amended, ordered to stand part of the Bill.

Clause 108 disagreed to.

Clause 109  - Different interests held in the same dwelling: effect of reliefs etc

Amendment made: 73, in clause109,page64,line7,leave out from ‘interest’ to ‘section’ in line 11 and insert ‘if—
(a) the day in question is relievable with respect to that interest by virtue of section150 (providers of social housing),
(b) by virtue of section148 (charitable companies) the ownership condition is regarded as not met with respect to the interest on that day, or
(c) the taxable value of the interest on that day is taken to be zero by virtue of’.—(Mr Gauke.)

Clause 109, as amended, ordered to stand part of the Bill.

Clauses 110 to 113 ordered to stand part of the Bill.

Clause 114  - Dwelling in grounds of another dwelling

Amendments made: 74, in clause114,page66,line33, after ‘if’ insert ‘(a)’.
Amendment 75, in clause114,page66,line35,at end insert ‘or
(b) the ownership condition is, by virtue of section148 (charitable companies), regarded as not being met on that day with respect to one or the other of those interests.’.
Amendment 76, in clause114,page67,leave out line 2.—(Mr Gauke.)

Clause 114, as amended, ordered to stand part of the Bill.

Clause 115  - Dwellings in the same building

Amendments made: 77, in clause115,page68,line1,after ‘if’ insert ‘(a)’.
Amendment 78, in clause115,page68,line3,at end insert ‘or
(b) (in a case where paragraph (a) of subsection (2) applies) the ownership condition is, by virtue of section148 (charitable companies), regarded as not being met on that day with respect to one or the other of the chargeable interests mentioned in that paragraph.’.
Amendment 79, in clause115,page68,leave out line 15.—(Mr Gauke.)

Clause 115, as amended, ordered to stand part of the Bill.

Clauses 116 to 129 ordered to stand part of the Bill.

Clause 130  - Effect of reliefs under sections 131 to 150

Amendment made: 80, in clause130,page76,leave out line 31.—(Mr Gauke.)

Clause 130, as amended, ordered to stand part of the Bill.

Clauses131 to 133 ordered to stand part of the Bill.

Clause 134  - Meaning of “non-qualifying individual” and “qualifying individual”

Amendment made: 81, in clause134,page79,line32, leave out subsection (2).—(Mr Gauke.)

Clause 134, as amended, ordered to stand part of the Bill.

Clauses135 to 147 ordered to stand part of the Bill.

Clause 148  - Charitable companies

Amendments made: 82, in clause148,page88,line35, leave out subsection (1) and insert—
‘(1) A charitable company that is entitled to a single-dwelling interest is regarded as not meeting the ownership condition with respect to the interest on any day on which the interest is held by the company for qualifying charitable purposes, other than an excluded day.’.
Amendment 83, in clause148,page89,leave out lines 1 to 27 and insert—
‘(3) A day is an “excluded day” if the following conditions are met—
(a) a person (“the donor”) has on or before that day made, or agreed to make, a gift to the charitable company or to a charity that is connected with it,
(b) there exist on that day arrangements under which or as a result of which a linked individual is permitted, or is to be or may in the future be permitted, to occupy the dwelling, and
(c) it is reasonable to assume from either or both of—
(i) the likely effects of the gift and the arrangements, or
(ii) the circumstances in which the gift was made and the circumstances in which the arrangements were entered into,
that the gift would not have been made and the arrangements would not have been entered into independently of one another;
but see the exception in subsection (5).
(4) In subsection (3)(b) “linked individual” means an individual who—
(a) is the donor, or
(b) was, when the arrangements were entered into, an associate of the donor.
(5) A day is not an “excluded day” if the first, second or third condition is met on that day.
The first condition is that the activities undertaken for carrying out the primary purposes of the charitable company include, or normally include, opening the dwelling to the public.
The second condition is that the dwelling is being exploited through commercial activities that involve, or normally involve, opening the dwelling to the public.
The third condition is that steps are being taken—
(a) to secure that the first or second condition will be met without undue delay, or
(b) to secure that the single-dwelling interest will be sold without undue delay.
(6) In subsection (5)—
(a) “opening the dwelling to the public” means offering the public the opportunity to make use of, stay in or otherwise enjoy, on at least 28 days in any year, areas that constitute a significant part of the interior of the dwelling or of the dwelling’s garden or grounds;
(b) “without undue delay” means without delay, except so far as delay is justified by commercial considerations or for the sake of a primary purpose of the charitable company.
(7) For the purposes of subsection (6)(a), the size (relative to the size of the whole dwelling or of the whole garden or grounds), nature, and function of the areas concerned are to be taken into account in determining whether they form a significant part of the interior of the dwelling or (as the case may be) of the garden or grounds.’.
Amendment 84, in clause148,page89,line28,leave out ‘(8)’ and insert ‘(3)(a)’.
Amendment 85, in clause148,page89,line30,leave out ‘charity’ and insert ‘charitable company’.— (Mr Gauke.)

Clause 148, as amended, ordered to stand part of the Bill.

Clause 149  - Section 148: supplementary

Amendments made: 86, in clause149,page89,line33, leave out ‘a substantial donor to a charitable company’ and insert ‘the donor’.
Amendment 87, in clause149,page89,line36,leave out ‘substantial’.
Amendment 88, in clause149,page89,line38,leave out ‘substantial’.
Amendment 89, in clause149,page90,line6,leave out subsection (4).
Amendment 90, in clause149,page90,line9,at end insert—
‘(5A) For the purposes of section 148(3)—
(a) the making of a gift is disregarded if it is made before the day on which this Act is passed, and
(b) an agreement to make a gift is disregarded if the agreement is made before that day.
(5B) Arrangements entered into before the day on which this Act is passed are disregarded for the purposes of section 148(3) unless a material alteration has been made to them on or after that date.
“Material alteration” means an alteration affecting anything in the arrangements that relates to the individual’s having (at any time), or potentially having, permission to occupy the dwelling.
(5C) References in section 148 and this section to a gift include the disposal of an asset for consideration of an amount or value which is less than the market value of the asset.
(5D) In section 148 and this section “arrangements” includes any scheme, arrangement or understanding of any kind, whether or not legally enforceable, involving a single transaction or two or more transactions.’.
Amendment 91, in clause149,page90,line10,leave out subsection (6).—(Mr Gauke.)

Clause 149, as amended, ordered to stand part of the Bill.

Clause 150 ordered to stand part of the Bill.

Ordered,
That Clause 150 be transferred to page 88 line 33.— (Mr Gauke.)

Clauses 151 to 160 ordered to stand part of the Bill.

Schedule 31  - Annual tax on enveloped dwellings: returns, enquiries, assessments and appeals

Amendments made: 95, in schedule 31, page393,line17, leave out paragraph 2 and insert—
2 In this Part of this Act—
(a) references to the delivery of an annual tax on enveloped dwellings return are to the delivery of a return that complies with all requirements imposed by or under any of sections 157 and 159 and paragraph 1;
(b) references to the delivery of a return of the adjusted chargeable amount are to the delivery of a return that complies with all requirements imposed by or under any of sections 158 and 159 and paragraph 1.’.
Amendment 96, in schedule 31, page399,line11, leave out ‘an annual tax on enveloped dwellings return’ and insert ‘a return of the adjusted chargeable amount’.
Amendment 97, in schedule 31, page400,line29, leave out from ‘27’ to end of line 30 and insert ‘“taxpayer” means—
(a) in relation to an assessment under paragraph 21, the chargeable person;
(b) in relation to an assessment under paragraph 22, the person mentioned in paragraph 22(1).’.
Amendment 98, in schedule 31, page402,line23, leave out ‘paragraph’ and insert ‘paragraphs 24 and’.
Amendment 99, in schedule 31, page415,line34, after ‘157’ insert ‘or158’.
Amendment 100, in schedule 31, page416,line2, leave out ‘an annual tax on enveloped dwellings’ and insert ‘a’.—(Mr Gauke.)

Schedule 31, as amended, agreed to.

Clause 161  - Payment of tax

Amendment made: 92, in clause161,page95,line39,leave out ‘103(3)’ and insert ‘97(3)’.—(Mr Gauke.)

Clause 161, as amended, ordered to stand part of the Bill.

Clause 162 ordered to stand part of the Bill.

Schedule 32  - Annual tax on enveloped dwellings: information and enforcement

Amendments made: 101, in schedule 32, page416,line34, leave out ‘paragraph 28(2)’ and insert ‘paragraphs 28(2) and 31(3)’.
Amendment 102, in schedule 32, page417,line19, after ‘return’ insert ‘or a return of the adjusted chargeable amount’.—(Mr Gauke.)

Schedule 32, as amended, agreed to.

Clauses 163 to 166 ordered to stand part of the Bill.

Schedule 33 agreed to.

Clause 167  - Orders and regulations

Amendments made: 93, in clause167,page98,line26, leave out from ‘to’ to end of line 29 and insert—
‘(a) an instrument containing only an order under section98(5), or
(b) an instrument to which subsection (5) applies.’.
Amendment 94, in clause167,page98,line31,leave out ‘154(1)(b) or (c)’ and insert ‘154(1)’.—(Mr Gauke.)

Clause 167, as amended, ordered to stand part of the Bill.

Clauses 168 to 172 ordered to stand part of the Bill.

Clause 64  - Charge on certain high value disposals by companies etc

Question proposed, That the clause stand part of the Bill.

David Amess: With this it will be convenient to discuss that schedule 24 be the Twenty-fourth schedule to the Bill.

Catherine McKinnell: I congratulate you, Mr Amess, on your speedy passage through a complex piece of legislation.
The clause introduces a charge to capital gains tax on both UK and non-UK resident natural persons, other than genuine commercial businesses and other limited categories. It relates to the clauses that have been considered on enveloped dwellings, because UK resident limited companies currently pay corporation tax, rather than capital gains tax, on gains made. Given that capital gains tax is higher than corporation tax, under these provisions both resident and non-resident companies will pay capital gains tax on disposals. The provisions need to be read in conjunction with the ATED provisions that we just considered.
I want to raise a number of issues that have been highlighted, particularly on how the provisions have been targeted, which is fairly broadly and expensively. The tax information and impact note makes it clear that all three taxes—stamp duty land tax, capital gains tax and ATED—will apply to the same UK high-value residential property valued at more than £2 million, held by non-natural persons and not used for the specified relievable purposes that we have already discussed, nor used by persons relieved from the charge.
The types of property that the relief applies to are fairly extensive. The list includes: property development, investment rental and trading businesses, residential properties open to the public for at least 28 days a year on a commercial basis, residential properties held for employee accommodation, residential properties owned by a charity and held for charitable purposes, working farmhouses, diplomatic properties and some other publicly-owned residential properties.
Concerns have been expressed that the scheme is widely targeted. The Institute of Chartered Accountants in England and Wales has called it “fundamentally flawed” and said:
“It is not properly targeted, is highly complex and burdensome and likely to be expensive to administer and enforce.”
When one looks at all the measures being implemented in the Bill, it starts to look distinctly like a mansion tax, although Government Members would shudder at the thought.
Given the number and types of properties listed as being relieved from the package, do the Government have figures on how much capital gains tax is expected to be paid that would not have been paid before this measure was introduced? What is the likely split between the UK-resident non-natural persons and the non-UK resident non-natural persons who are likely to be affected by the change? The tax information and impact note suggests that the new liability to capital gains tax will result in an additional £25 million to the Exchequer in 2013-14, then no additional receipts in 2014-15 and 2015-16, before increasing slightly to £5 million in 2016-17 and 2017-18. Most people would find those figures slightly odd and surprising. For the purposes of the Committee, can the Minister clarify how those figures were arrived at?

David Gauke: Clause 64 introduces schedule 24, which provides for a capital gains tax charge on the disposal of high-value residential properties when those properties are held in envelopes, such as companies. Those vehicles are known as non-natural persons. The capital gains tax charge forms part of a package of measures intended to ensure that non-natural persons holding high-value residential properties pay their fair share of tax. The other components of that package are the annual tax on enveloped dwellings, which we have just discussed, and the 15% rate of stamp duty land tax that we introduced last year.
It may again be helpful if I provide a little background. The avoidance of property tax due on residential property is unacceptable. As I have already explained, the use of corporate structures to hold UK property and avoid paying stamp duty land tax has been identified as an issue by the Government and we are taking action to ensure the fair taxation of residential property. We consulted on a package to address such forms of property tax avoidance over summer 2012 and received over 175 representations. In response to the consultation, we announced a number of changes to the original proposals. The Government were able to focus the measures so that that they would more effectively deter tax avoidance while not impacting on bona fide businesses. In particular, a series of exemptions were announced to apply across the package of measures to ensure that they targeted property owners who were actively avoiding paying their fair share of tax. The Government also decided that the capital gains tax charge should apply to gains that built up after 6 April 2013 only, which acknowledges concerns raised that taxing gains built up before April 2013 could in some way discourage de-enveloping.
In January 2013, the Government announced that, for consistency, the capital gains tax charge would apply to UK companies as well as non-resident ones. Some gains that were previously chargeable to corporation tax will instead be charged to capital gains tax, but no gain that is presently taxable will fall out of the tax net. If a gain or part of a gain is not charged to capital gains tax under this measure, it will remain subject to existing corporation tax and capital gains tax rules.
Clause 62 and schedule 24 extend the scope of capital gains tax so that it is payable by companies and by some other non-natural persons at 28% on gains that they make when selling UK residential property worth more than £2 million. The charge applies whether the non-natural person is resident in the UK or overseas. They will not be liable to corporation tax on the same gains, and individuals, trusts and personal representatives are excluded from the new charge. The capital gains tax charge is closely linked to the annual tax on enveloped dwellings, which we have just discussed. Broadly, if the annual tax was not charged on the property while it was owned, capital gains tax will not be charged either.
As I have said, a wide range of exemptions from the annual tax on enveloped dwellings exist for genuine commercial businesses. Companies benefiting from such exemptions will also be exempt from the capital gains tax charge under clause 64 and schedule 24. As under the new annual tax on enveloped dwellings regime, there are, for instance, exemptions for properties used in bona fide rental and property development businesses, for certain farmhouses and for properties that are open to the public as part of a trade. The Government recognise that such properties are unlikely to be owned by companies for tax avoidance purposes.
If the residential property was acquired before April 2013, the charge will apply only to the gain for the period from April 2013 to the date of disposal unless the taxpayer chooses to base the gain—or loss—on the whole period of ownership. Any part of a gain that is not subject to the new CGT charge remains subject to the normal rules. A UK company will be chargeable to corporation tax on that part of the overall gain. As a result of the exemptions introduced, the restriction of the charge to disposals of directly-held property and the rebasing, which ensures that gains up to April 2013 are not charged, the Government expect that a relatively small number of non-natural persons will be subject to the charge.
I turn to the questions relating to yield. As the hon. Member for Newcastle upon Tyne North said, the estimated yield set out at the Budget is £25 million in the first year, nil for the next two years, and £5 million a year for the next two years. That was signed off by the Office for Budget Responsibility. However, like all forecasts, future yields and costs, the yield is dependent on a number of assumptions, including house price levels and volume of house sales in the years to which the figures relate. Those assumptions are subject to margins of error.
The yield when the policy was originally announced and the measure applied only to non-resident, non-natural persons, was scored as negligible. That meant it was not expected to reach £3 million in any of the years forecast. However, some yield is expected from non-residents. It would be fair to say that only a small number of non-natural persons will be affected each year. We estimate fewer than 20 in total; that is both UK residents and non-residents.
The new CGT charge on disposals of property worth more than £2 million is an important element of the package to ensure the fair taxation of residential property. It complements the other elements: the 15% rate of SDLT and the ATED, which we have debated. Taken together, the changes provide a significant deterrent to holding high-value UK residential property in envelopes. The CGT charge plays its part by ensuring that disposals of property held in envelopes will be subject to tax, and I hope that the clause and schedule will stand part of the Bill.

Question put and agreed to.

Clause 64 accordingly ordered to stand part of the Bill.

Schedule 24 agreed to.

Clause 173 ordered to stand part of the Bill.

Clause 174  - Treatment of liabilities for inheritance tax purposes

Question proposed, That the clause stand part of the Bill.

David Amess: With this it will be convenient to discuss that schedule 34 be the Thirty-fourth schedule to the Bill.

Rory Stewart: Given the late hour, I am not going to take too much of the Committee’s time. Clause 174 and schedule 34 are very important parts of the Bill. On behalf of my constituency and other rural areas of the country, I would like to focus on some of the issues around them.
Overall, the Budget is excellent. I am very excited by what the Government are doing on SMEs, on employers’ national insurance, on taking people out of tax, on investment relief, and on cheaper beer, thanks to my hon. Friend the Economic Secretary to the Treasury.
However, there are some serious issues, in particular in relation to new section 162A and 162B of the Inheritance Tax Act 1984. Essentially, the clause disincentivises people from borrowing on their houses and their estates to invest. That is a difficult problem to explain. To put it in the clearest possible terms, imagine two notional people—Kwasi and Brooks—though not, of course, the people of those names here. Imagine each of them had a house worth £2 million and both of them wished to make a £1.5 million investment in an enterprise, which is something we would like to encourage. They take two different approaches. Brooks decides to sell his £2 million house, buy a smaller house worth £500,000 and invest £1.5 million cash in the business; Kwasi, on the other hand, chooses to keep his house and instead borrow £1.5 million against its value to invest in the business.
What is the situation we now have? Their net wealth remains the same—£2 million; their investment remains the same—£1.5 million. Their equity remains the same—£500,000. However, in the event of death, Brooks’s descendents would not be liable for anything more than tax on £500,000, whereas Kwasi’s would be liable for tax on £2 million.
Why does this matter? It matters because across the country an enormous amount of the investment made by estates and by farms—the policy also applies to a lot of medium-sized farms in my constituency, and does not affect only the £2 million level, which was just an example—is made by borrowing against existing houses. That is one of the things that allows a vigorous rural economy. Unfortunately, the new policy could result in a situation in which, understandably, estate owners and farmers choose either to retain their houses—farmers are very reluctant to sell their houses or farms, as Committee members can imagine—in which case they will not invest because of the tax liability that that imposes on their descendents, or to sell their assets to make the investment, which would cause other kinds of problems. That is why I am hoping that we can have further consultation and discussion on the policy.
As Conservatives, we are strongly committed to two principles. One is the encouragement of investment and entrepreneurial activity; the other, of course, within rural constituencies, is our belief that the deep structure of ownership of small farms and estates is part of the deep structure of our rural life. I therefore beg the Government to reconsider some of the details of the clause and schedule.
The policy was introduced for a very clear reason: the Treasury concluded that the current situation allowed people to avoid tax. I would argue that within the general anti-abuse rule we already have enough power to catch anyone engaged in aggressive tax avoidance.
I hope that the Government are willing to consider just two small things. One is the possibility of a delay. At the moment, the policy comes into play at Royal Assent, which creates a retroactive problem. Most large estates and farms in rural Britain will have borrowed against their properties—they have gone to an external source of financing but have put up their house or state against that external source—and anybody trapped in that situation at the moment will be forced to deleverage and get out of all those agreements. However, they are not being given much time to do so.
I also beg the Government to consider the possibility of a serious consultation. This is a policy that I think will not result in our ending the kind of abuse that the Government are focused on but will have a damaging impact on some of the most entrepreneurial and energetic people in rural areas, and on the great Conservative principle of balancing innovation with continued property ownership.

Catherine McKinnell: Save for the passionate belief in the main tenets of Conservative ideology as being focusing on investment and freedom of enterprise, I agree with most of what the hon. Member for Penrith and The Border has said. He gave a useful summary of a scenario which I was going to set out—although I was going to use Bill and Ben rather than Brooks and Kwasi—that shows the anomaly in the clause and schedule, which will impact differently upon people in comparable positions. It also highlights what is alarming or—in the words of the Chartered Institute of Taxation—disconcerting to some people. The tax information impact note clearly states:
“there has been no consultation on the measure…It is disconcerting that such complex provisions have been introduced without proper consultation—the result is flawed legislation. Given that they are retroactive”—
as the hon. Gentleman eloquently explained—
“the excuse that this was necessary to prevent forestalling is hollow.”
I should be interested to hear the Minister’s response to the worries outlined by the hon. Gentleman and his explanation of why no consultation has taken place on the measure. Do the Government intend to iron out some of the problems that have been highlighted, while ensuring that genuine tax avoidance is targeted by the measure, which we all support? Will the Minister explain why the general anti-abuse rule cannot be used to deal with the abuses under clause 174 and schedule 34, the abuses that it is aimed at preventing from happening, given that the inheritance tax falls within the scope of the general anti-abuse rules?
I turn now to a couple of issues that need clarification. The tax information impact note suggests that “only a few hundred” estates will be affected by the measure. That number is rather vague, so perhaps the Minister can be more specific about the figures. Is he aware of how many estates left on death have been used by the scheme? Historically, how much revenue has been lost to the Exchequer as a result of the loophole? Has such a process been marketed to people as an inheritance tax avoidance method? It is incumbent on Her Majesty’s Revenue and Customs to deal with such issues sensitively following a death, but can the hon. Gentleman outline what steps have been taken to challenge attempts to avoid tax in the event of death by such avoidance arrangements that could be exploited?

David Gauke: As we have heard, clause 174 and schedule 34 reform the inheritance tax treatment of outstanding liabilities. They introduce new conditions and restrictions on when a liability can be deducted from the value of an estate. The Government are making such changes to improve the integrity and fairness of the inheritance tax system. In doing so, we will close down avoidance opportunities that are currently being exploited and remove the existing inconsistency in the treatment of loans secured against different assets.
By way of background, inheritance tax is charged on the value of a person’s estate at death and on the value of assets transferred into a trust. The current rules allow almost all outstanding liabilities at death to reduce the value of an estate, irrespective of how the borrowed moneys have been used or whether the loan is repaid following the death. In most cases, that does not matter because the liability will be a normal commercial debt and will be repaid after death. However, the current rules create opportunities for avoidance and can lead to situations in which decisions and arrangements are made purely for tax reasons. I am sure that members of the Committee agree that that is undesirable and should be addressed.
Contrived arrangements and avoidance schemes are on the market to exploit the current rules, the number of which is expected to increase as other avoidance routes are closed. For example, when the creditor is a family member, a family trust or has some other connection to the deceased, they may decide that the loan need not be repaid. In doing so, the value of the estate on which tax is charged is reduced by that liability, yet the amount of estate left for the beneficiaries is not decreased as the liability is not repaid. As such, the estate and beneficiaries suffer no loss, but the Exchequer does.
Such debts might be index-linked or carry an interest charge that is rolled up as part of the overall debt. Under current rules, the full amount of the debt plus interest must be allowed as a deduction against the estate, but the creditor may waive the interest element to avoid paying income tax on the interest, so a larger proportion of the estate passes to the beneficiaries. Again, the Exchequer loses because of the mismatch.
Other avoidance arrangements exploit the fact that the current rules allow a deduction where a loan has been used to acquire property that qualifies for a relief, such as business assets, or property that is specifically excluded from inheritance tax, such as interests in overseas trust assets settled by a non-UK domiciled individual. The assets are not taxable, yet the rest of the taxable estate is reduced by the liability. This incentivises individuals to take out loans and purchase certain types of assets just to avoid inheritance tax.
There is also an inconsistency in how the current rules treat liabilities used to acquire assets that qualify for a relief but are secured against different types of assets. For example, where a loan is used to acquire certain business assets and is secured against the business, the liability is, as one might expect, deducted from the value of the business, with relief granted on the net value of the business. But if that same loan is instead secured against other taxable assets in the estate, the liability is deducted from the value of those taxable assets, not the business assets. The full gross value of the business assets therefore qualifies for relief and the loan used to buy the business assets reduces the value of the rest of the estate.
Such inconsistency creates an advantageous tax position and distorts decision making by encouraging individuals to secure business loans against their personal property where there may be no need to. The Government recognise that lenders often require some form of security before they are willing to lend, but we believe the tax system should neither encourage nor penalise the choice of one form of security over another.
Clause 174 and schedule 34 address opportunities for avoidance and inconsistency in three ways. First, deductions will be disallowed where the loan has been used to acquire excluded property—property that is excluded from the charge to inheritance tax. That will remove the attraction of avoidance schemes that involve using loans to purchase interests in excluded property trusts by UK-domiciled individuals. Secondly, where the loan has been used to acquire relievable property—property that qualifies for a relief—the loan will first be set against that property. The relief will therefore be allowed against the net value of the property. This will result in greater fairness in how loans used to acquire relievable property are treated for inheritance tax purposes. It will stop certain schemes where the liability reduces the value of the estate and relief is claimed in full, and will remove the tax incentive to take out loans against chargeable personal assets to finance investment in business or other relievable property.
Thirdly, the loan will generally only be allowable as a deduction if it has been repaid from assets in the estate. That will ensure that the tax treatment reflects the economic consequences of repaying the loan. In other words, the deduction will be allowable only where the amount of the estate available for distribution to the beneficiaries has been reduced, because the loan has actually been repaid. This change will also address the current mismatch used by some avoidance schemes that allows a deduction for IHT purposes, but does not tax the corresponding rolled-up interest if the debt is left unpaid.

Rory Stewart: The Minister is absolutely correct that there is no reason why the taxation system should particularly favour one form of borrowing over another or one form of security over another. Unfortunately, it is simply the case that the structure the rural economies in particular depends on investments from people who are—to use a clichéd phrase—land-rich and cash-poor. In other words, the main way in which estates—owners of woodland, small farmers, people who tend to have most of their wealth tied up in property—can actually borrow money at an advantageous tax position in order to invest is exactly through these types of schemes. Unfortunately, clearing up the loophole is likely to have a significant effect on people’s willingness to make that type of investment, because it will be difficult for them to secure—not in theory, but in practice—external financing with their own property as collateral.

David Gauke: I am grateful to my hon. Friend, who is a doughty defender of the interests of his constituents in Penrith and The Border. To address that point, I turn to some of the feedback that we have had from interested parties. To avoid publicising the existence of such arrangements and to protect the Exchequer, there was no prior warning of, or formal consultation on, the proposed changes. As such, the Government expected that interested parties would come forward with suggestions for refining the legislation following the publication of the Bill in March. HMRC has received comments from representative bodies, practitioners and individuals, which have highlighted sections of the legislation that might helpfully be clarified. Stakeholders have also expressed concern that the new provisions will apply retrospectively where individuals secured business loans on their non-business property for commercial reasons rather than for avoidance purposes before the changes were announced, and that as a result such individuals would face a higher IHT bill if they died before the debt was repaid.
In response to the comments from interested parties, the Government are proposing several amendments to schedule 34. They were due to be tabled today, but because we have reached the debate on clause 174 earlier than anticipated, they will now be tabled on Report. The Government recognise that some lenders may require security in the form of personal assets before they are willing to lend, and that individuals may not be able to restructure the loan or unwind the arrangements for some time. An amendment will, therefore, be tabled to change the commencement date so that new rules dealing with liabilities incurred to acquire a relievable property will apply only to new loans taken out on or after 6 April 2013. That will mean that the new provisions will not affect someone who took out a business loan in the past secured against their other assets. Amendments will also be tabled to clarify the interpretation of the legislation to ensure it works as intended and to address some of the technical issues that were identified in feedback. I have no doubt that my hon. Friend the Member for Penrith and The Border will study those amendments closely, and I hope that they will, at least in part, satisfy his concerns.
The reason why no consultation took place was that we did not want to expose the avoidance schemes to greater publicity, because that might have encouraged the setting up of more such schemes. In terms of the impact on borrowing and business investment, the new provisions are intended not to prevent or deter individuals from starting their own business or investing in an existing one, but to close down avoidance opportunities and remove distortion in the tax system. The change will not prevent a business from securing a loan against non-business assets or disrupt business activity; it will only remove the current anomaly that can provide a tax advantage for structuring debt in one way over another. It is also worth pointing out that according to independent research published in SME Finance Monitor, the majority of business overdrafts and loans are unsecured, and where security is provided, it is typically in the form of a charge on business property such as commercial mortgages. That is supported by a recent review of IHT returns. Most estates that have such liabilities will, therefore, be unaffected by the changes.
On the question of whether to use the GAAR rather than legislating specifically, it is worth pointing out that the GAAR is designed not to replace anti-avoidance legislation but to supplement it. I disagree with the suggestion that the provisions are retrospective. The new provisions will only change the tax treatment in future and will not result in additional IHT charges before the commencement date. We recognise that people may need to unwind their arrangements and that that may be costly and time-consuming, which is why we plan to table the amendments regarding the commencement date. The yield is estimated to be approximately £70 million between 2013-14 and 2017-18, based on estimates of ongoing losses. There are numbers in the Red Book in terms of existing schemes and arrangements.
A question was asked about whether the schemes are being marketed. The answer is yes. We have recently seen an avoidance scheme that sought to exploit the current rules. I will not set out all the details here—particularly given the late hour—but that is not something that we want to encourage. As for how many estates will be affected, it is worth pointing out that, currently, only 4% of estates pay any inheritance tax at all; of those, only a few hundred are likely to have outstanding debts upon death that will be affected by these provisions. Most taxable estates will not be affected, but I cannot be any more specific than that.
In conclusion, the Government are committed to acting quickly and robustly to tackle tax avoidance. Clause 174 and schedule 34 will ensure that the new provisions reduce potential tax losses and reduce the role of inheritance tax in business financing decisions, while minimising the impact on legitimate arrangements. I hope that the clause and schedule may stand part of the Bill.

Question put and agreed to.

Clause 174 accordingly ordered to stand part of the Bill.

Schedule 34 agreed to.

Clause 175  - Election to be treated as domiciled in United Kingdom

Question proposed,That the clause stand part of the Bill.

Catherine McKinnell: With your permission, Mr Amess, I would like to group comments on clauses 175 and 176 together as they deal with the same issue.

David Amess: Yes, that is quite acceptable.

Catherine McKinnell: Thank you. Clauses 175 and 176 introduce inheritance tax provisions that affect individuals who are not domiciled in the UK but who are, or have been, married to, or in a civil partnership with, someone who is domiciled in the UK. While the Chartered Institute of Taxation described the measures as “long overdue”, it highlighted a number of concerns, which, if addressed, it believes would improve the legislation. I felt that it would be useful for the Committee to put those to the Minister to gauge his response.
Under the new election regime, elections made while both of the couple are still alive will take effect for transfers on or after the date of election. Where there has been a transfer as a result of the death of a UK domiciled individual, a surviving non-UK domiciled spouse or civil partner may elect to be treated as UK domiciled for inheritance tax purposes from the date of death. Elections that follow a death will be valid only if they are made within two years of the death.
While a two-year requirement will suffice in most cases, the chartered institute raised concerns that some unfairness could arise. What would happen if there has been a claim under the Inheritance (Provision for Family and Dependants) Act 1975 where time limits run from the date of the grant, not death, because that might not be resolved until some considerable time later? The institute gives detailed examples of the effect of that in practice, but, ultimately, urges that the difficulties raised by the varying circumstances that could apply could be met simply by adopting a more flexible approach, similar to that already contained in the Inheritance Act 1984, which permits:
“such longer period as an officer of Revenue and Customs may in the particular case allow.”
That allows for discretion to be applied where an unfair situation would otherwise be created.
Will the Minister clarify whether consideration has been given to a more flexible approach? Will he also tell us why the provision has not been structured so that it is the transferee’s domicile and relationship status at the time of the transfer that is relevant, rather than that when he or she makes the election?
One final point: the tax information and impact note states that this measure is necessary to comply with EU law. Once again, the chartered institute raised the concern that it does not feel confident that the measure will make the law EU-compliant. It suggested why that is, and why it will remain problematic for the Government, and that it is at risk of further cost, further EU challenges and perhaps further debates when we gather again this time next year to discuss how to repair the legislation in the next Finance Bill. What consideration has been given to the concerns raised by the institute regarding EU compliance? What steps have been taken to address them? If none have been, why not?

David Gauke: Clauses 175 and 176 will reform the inheritance tax treatment of transfers between UK-domiciled individuals and non-UK-domiciled spouses or civil partners. The changes under clause 175 will allow individuals who are not domiciled in the UK but who have a UK-domiciled spouse or civil partner to elect to be treated as UK-domiciled for the purposes of inheritance tax. Clause 176 will increase the lifetime limit on transfers between a UK-domiciled spouse or civil partner and their spouse or civil partner domiciled elsewhere, setting the cap at a fair, realistic and appropriate level. We are making those changes to ensure fairness in the UK tax system and to address EU concerns regarding existing legislation.
Transfers between UK-domiciled spouses and civil partners are usually exempt from inheritance tax, but where the transferor is domiciled in the UK and the spouse or civil partner is not, the exemption is capped at £55,000. The cap is to prevent assets that would be subject to inheritance tax on death being moved overseas to avoid UK tax. I am sure that hon. Members will agree that that is a sensible principle.
On 30 September 2010, the European Commission queried the difference in inheritance tax treatment in transfers between UK-domiciled and non-UK-domiciled spouses. As I said, the reason for the difference in treatment is to protect assets from falling out of the UK tax net. A fundamental principle of inheritance tax is that an individual domiciled in the UK should be subject to inheritance tax on their worldwide estate. If both spouses or civil partners are domiciled in the UK, and assuming that they leave their individual estates to each other, their combined estate is subject to inheritance tax on the death of the second spouse or civil partner.
However, where the second spouse or civil partner is not domiciled in the UK, any asset that is not in the UK will not be liable for inheritance tax on their subsequent death. In the absence of the limited exemption to transfers, it would be possible for an individual domiciled in the UK to transfer their entire estate to their non-UK-domiciled spouse or civil partner, free of inheritance tax. The surviving spouse or civil partner would then be able to remove all assets from the UK, even if they continue to live here. Provided that they retain their non-UK-domiciled status, those assets would fall outside the estate for future changes to inheritance tax.
To address the European Commission’s concern about existing legislation, the Government committed at Budget 2012 to introduce a new election regime and to raise the lifetime limits on the value of transfers of assets to a non-UK-domiciled spouse or civil partner. Taken together, the changes provide a balanced approach to the risk in the area, while supporting the Government’s aim to create a fairer tax system.
Clause 175 will give non-domiciled spouses and civil partners the choice to elect to be within the UK inheritance tax system. For those who do so, their worldwide estate will be liable to UK inheritance tax, but subsequent transfers between an electing spouse and their UK-domiciled spouse or civil partner will be exempt from inheritance tax. To put it in another way, full spousal relief will be provided. The clause will ensure that, if non-domiciled spouses wish to take advantage of the reliefs available for inheritance tax, they do so on the same basis as UK-domiciled individuals.
The measure will affect only a small number of individuals and households. The figures for the 2011-12 tax year show that approximately 19,000 estates left on death paid inheritance tax, which represents less than 44% of the total number of estates. The number of the individuals affected by the clause will be significantly fewer, as it only concerns those where one spouse or civil partner is non-UK domiciled.
Clause 176 increases the exemption limit to the same level as the prevailing nil rate band—currently £325,000. A person will be able to transfer up to £325,000 in their lifetime and additionally benefit from the nil rate band of £325,000 on death, meaning there will be no inheritance tax to pay on £650,000 of the estate. The exemption limit applies only where the non-UK domiciled spouse elects not to be within the UK IHT system. That increase, taken together with the changes I have already mentioned, provides a balanced approach to risk in this area.
Following the publication of draft legislation in December, several changes were made to refine the legislation to take into account stakeholder comments. Having considered further representations made since the introduction of the Bill in March, the Government plan to table amendments on Report to ensure that individuals have the option to make elections retrospectively, where their circumstances change. The amendments will enable individuals who are domiciled in the UK but were previously domiciled elsewhere to make a retrospective election. Similarly, the amendments will enable individuals previously married or in a civil partnership to make a retrospective election following divorce or dissolution, which will ensure that changes in domicile or marriage status do not restrict individuals’ ability to elect to be in the UK inheritance tax system.
The hon. Member for Newcastle upon Tyne North expressed concern that two years is not long enough to make a death election. Elections that follow a death will normally be valid only if they are made within two years of the death. I want to put on the record that the Government recognise that there may be occasions when that time scale is too short. As a result, the legislation allows HMRC officers some discretion to extend the period, depending on the merits of the case. The Government are confident that the combination of measures set out in clauses 175 and 176 ensures our position is EU-compliant and represents a proportionate solution, given the risk of assets being transferred out of the UK tax net.
To return to whether the election should be effective from the date of transfer so the exemption covers gifts with reservation, we are considering the representations made by stakeholders in this area. However, the most obvious way to fully cover gifts with reservation would be to extend the seven-year period to which an election applies. That would significantly alter the legislation, and it would no longer meet the Government’s policy objectives. For example, it would bring the non-domiciled spouse’s overseas assets in for a much longer period.
In conclusion, these clauses give non-domiciled spouses and civil partners the choice to elect to be entirely within the UK inheritance tax system or to retain their non-domiciled status. This change addresses EU concerns and helps build a fairer tax system. For those who choose to elect, the clause ensures that from 6 April this year any transfers between them and their UK domiciled spouse or civil partner will be exempt from inheritance tax. I hope that clauses 175 and 176 stand part of the Bill.

Question put and agreed to.

Clause 175 accordingly ordered to stand part of the Bill.

Clause 176 ordered to stand part of the Bill.

Clause 177  - Fuel duties: rates of duty and rebates from 1 April 2013

John Pugh: I beg to move amendment 20, in clause177,page105,line25,leave out paragraph (b).

David Amess: With this it will be convenient to discuss clause stand part.

John Pugh: This is a probing amendment to lever in some discussion of the Government’s policy on LPG and taxation. I have a personal interest in this issue because I own and drive two top-of-the-range Japanese cars: a 3.4-litre Honda Legend and a 3-litre Toyota Camry, which motoring experts in the room will know has the same engine as the Lexus. Unfortunately, they are both 16 years old and very expensive to fill up with fuel. I have often considered the prospect of converting them; the cost starts somewhere in the region of £1,400 upwards, which probably exceeds the cost of each of them. Come to think of it, that probably exceeds the cost of both of them.
I want to deal with LPG in the same manner in which the hon. Member for Gateshead dealt with the issue of electric cars. I am concerned about securing continued investment in LPG as a fuel on our roads, and in the provision thereof. I am well aware that the Government encourage use of LPG, and there is a differential, but it varies from time to time and from Budget to Budget.
The question is whether the Government’s thinking over the long term is sufficiently clear to justify the kind of investment that may need to be made. After all, from time to time, minor fluctuations have had an appreciable effect on the LPG market. People will be familiar with what happened years ago when many buses converted to LPG, but subsequently converted back to diesel as the rates of LPG subsidy and diesel subsidy for buses varied. That can make an appreciable difference to what people do and what fuels they use.
We are not doing awfully well on the use of LPG in this country. There are 7 million LPG vehicles in Europe, but only 140,000 of those are in the UK. There are 26,000 fuelling outposts in Europe, but only 1,000 in the UK. The sadness is that we actually make LPG vehicles, but often exclusively for export, because the cost of small volume adjustments for cars that drive on the right-hand side are not straightforward for the manufacturer.
It is worth rehearsing some of the advantages of LPG, because I think that the Government have another objective here: it is about not just encouraging a desirable fuel, but encouraging something that is substantially beneficial compared with most other fuels that I can think of. LPG vehicles are 30% quieter than diesel vehicles. Their lifecycle hydrocarbon emissions are lower than for petrol vehicles. LPG emissions of benzene, a dangerous carcinogen, are about one-thirteenth of those from petrol and half of those from diesel, and their emissions of carbon dioxide are two-fifths of those for petrol. LPG vehicles emit one-fifth of the sulphur that petrol and diesel vehicles emit, and they score extraordinarily well on ozone precursors.
There are appreciable advantages in using LPG, and there are reasons for us to favour it over other fuels. The advantages of diesel are apparent to most motorists at the moment, but what is not so apparent is the number of particulates from diesel cars that pollute our atmosphere—for example, they are responsible for 75% of the particulates in London. Even if we take electric cars as a desirable alternative, the thinking in the motor industry is that they will become only a small, niche element of the market. They have high initial costs and high road weight, and there are limits to the technology and how it can be developed.
I have tabled the amendment with a view to asking the Government to sketch out the future for LPG. The industry needs certainty, it needs a long-term future and, I think we would all agree, it needs some sort of encouragement. LPG is unquestionably better for the environment than some of the alternatives. I hope that my amendment will tempt the Minister to say something about not just what the Government are currently doing, but what they will be doing in four or five years’ time—if they are still the Government.

Christopher Leslie: It is instructive that the hon. Member for Southport says that he has tabled amendment 20 in order to probe the Government’s long-term policy on the differential between petrol, diesel and LPG. It would be helpful if the Minister could address those points. At one time the Government were claiming to be the greenest Government ever; it would be interesting to see whether the Minister is still hugging those huskies—I do not know whether they have dropped that plan. When discussing the market and support for low-emission vehicles, the Minister can perhaps comment on Boris Johnson’s decision to distort some of the thresholds, which has had a negative effect on the low-emission vehicles market. Many people are questioning whether it is actually a backwards step.
I see that the amendment has been grouped with the wider clause stand part debate, which is on fuel duty. As the Committee knows, the Labour Government postponed or cancelled planned fuel duty rises on 13 separate occasions, including of course at the height of the global financial crisis. We have led calls on the Chancellor to ease the squeeze on motorists, families and businesses, and Labour piled on pressure when the Chancellor was prevaricating over fuel duty last summer when, as we all recall, he performed the quickest U-turn in the coalition’s history. The Secretary of State for Transport was sent out on Tuesday to defend the fuel duty rise and then another deferral was announced on the Wednesday.

Sheryll Murray: Will the hon. Gentleman clarify something? Had his Government’s planned increase in fuel duty not been abolished or deferred, how much extra would a litre of petrol cost at the pump now?

Christopher Leslie: I know the hon. Lady means well with her question, but she is labouring under a false impression that a Labour Administration now would not have done what they did at the time, which was to postpone and cancel fuel duty plans. The notion that she has a monopoly on flexibility when it comes to fuel duty arrangements is simply not the case. She is mistaken in her view of what might have happened in that hypothetical situation.

Sheryll Murray: Just for the record, is the hon. Gentleman confirming that the Labour Government did not intend to implement a 13p per litre increase in fuel duty had they won the last general election?

Christopher Leslie: I do not believe that the Labour Government would have continued with that. I am not quite sure what point the hon. Lady thinks she has hit upon, and I do not believe that she should take that simplistic view and draw a straight line. Chancellors keep tax levels under review and that would have been the case were Labour in government. I know that the hon. Lady secretly wishes that we had a Labour Government, and we of course wish the same because we did far more to help motorists. The hon. Lady voted to increase fuel duty by 3p per litre when she walked through the Lobby in favour of the 20p rate of VAT. I wonder whether she regrets her vote on that increase.

Sheryll Murray: Would the hon. Gentleman reverse the change to 20p if Labour was in power?

Christopher Leslie: We have consistently said that, were we in office, we would need a stimulus for the economy and a temporary reduction in VAT would be necessary. That is hardly new to the hon. Lady, but I take it from her answering a question with another question that she does not in any way regret that VAT rise to 20% and that extra 3p a litre that she personally put on fuel for her constituents. It hangs around her neck.

Sheryll Murray: Will the hon. Gentleman first confirm that 13 is bigger than three? Will he also confirm that tough measures had to be taken to get us out of the deficit that we inherited?

Christopher Leslie: I do not know which bankers were responsible for causing that particular deficit. We have obviously had that debate before and it would be wrong to extend this debate to the wider issues of the Conservatives’ consistent calls to deregulate the banking sector. We must not digress from the topic. The hon. Lady is wrong to assume that absolutely nothing would have been flexible or changed were a Labour Government in power. After all, as I said, we cancelled and postponed several fuel duty changes, about which she should not be surprised.

Pamela Nash: Is my hon. Friend as surprised as I am by the mock shock from the Government Benches? As he said, I believe we cancelled and postponed fuel duty rises 13 times throughout our 13 years in government, in response to the economic climate at the time. It is unthinkable that we would not have done so in government in the present circumstances.

Christopher Leslie: The fake surprise of Government Members says all we need to know about their partisan approach to these questions. It is clear that, when it comes to the crunch, they increased fuel duty, most significantly through VAT. If the hon. Member for South East Cornwall thinks that every time her constituents fill up at the petrol pumps, paying considerable amounts, they are thanking their lucky stars that an even higher rise has been forgone, she is living in a different world.

Sheryll Murray: Will the hon. Gentleman give way?

Christopher Leslie: I will give way if the hon. Lady agrees to do a survey of her constituents next time she is at the petrol pump. I want her to ask them, “Are you all grateful for what we’ve done about petrol?” I suspect they are not.

Sheryll Murray: I can say to the hon. Gentleman in reply to his question that my constituency is very rural, and the average income per household is about £23,000, so 13p per litre on every litre of petrol they consume on travelling to work is a considerable amount of money. Yes, they are really grateful to this Government for not implementing those rises.

Christopher Leslie: I notice that the hon. Lady is not preparing that survey. They do lots of surveys in marginal seats. I do not know what is going to happen at the next general election. I would personally be sad to see the hon. Lady lose her seat, although we clearly need a Labour representative in that seat.

Fiona O'Donnell: Can I tell my hon. Friend that I also live in and represent a very rural constituency? My constituents, who are seeing their living standards go down and down under this Government, feel no sense of gratitude, especially not for an increase in VAT to 20%.

Christopher Leslie: Conservative Members live under the fiction and delusion that the public are grateful for interventions and policies that are weighing them down in terms of lower wages and extra costs. I challenge the hon. Member for South East Cornwall and all Members on Government Benches to do the survey and ask their constituents what they think about the cost of living, in particular on fuel bills. My constituents are certainly not thanking the Government and being massively grateful for the misguided principles they follow.

Paul Uppal: On the issue of fact and fiction, I respectfully say to the hon. Gentleman that this comes in the context of a week when the shadow Chancellor, directly answering the question of whether Labour spent too much, said, “No, I don’t think we did.” That is not fiction; that is fact. This debate comes in that context.

Christopher Leslie: The hon. Gentleman seems to think that the problems of the global financial crisis were caused by too many police officers, nurses, teachers, hospitals, new schools—[ Interruption. ]

David Amess: Order. Can we now get back to amendment 20?

Christopher Leslie: I am only trying to answer the question, Mr Amess. I am trying to be as helpful as possible to the new guru of No. 10’s policy unit. I envisage him sitting at the table there with many of the new fresh-faced Members as they produce detailed papers that are then ignored by the Prime Minister weeks later. I wish the hon. Gentleman luck. I hope he has some influence in that new august body and that when the reshuffle comes he does as well as the Minister assumes he will.
It is clear that the Government have a bad record on the costs affecting motorists. It is important to listen to the response to the amendment tabled by the hon. Member for Southport and to get on the record what exactly Government policy is on LPG and the differentials.
The Government should also say a word about what is happening in the market more generally. We heard recently about the European Commission investigation into oil companies, the distortion of pricing and the manipulation of published indices. We tabled amendments to the Financial Services Bill to ensure that commodities and oil came under the regulatory perimeter of the Financial Conduct Authority, to ensure transparency and so that we could have proper clarity about what is happening in the oil market. That is another issue about which our constituents are concerned. They want to ensure that the price at the pump is a genuine price, reflecting the real market value and not some rigged or distorted figure that the industry has colluded to produce. That is an incredibly important point.

Sajid Javid: It is a pleasure to see you in the Chair again, Mr Amess.
The clause freezes fuel duty rates. We recognise the effect that persistently high pump prices have on households and on businesses, and we have taken action. The clause is the latest in a series of active steps that the Government have taken to support motorists. Why have we acted? We inherited a plan to support motorists through a fuel duty escalator and seven fuel duty increases. The previous Government planned to increase fuel duty by more than inflation in each year of the Parliament. We rejected that plan. This Government understand that motoring is an essential part of everyday life for families and businesses up and down the country. For many, the car is a necessity. Motorists have been feeling the pressure of high pump prices over recent years. Since coming to office, therefore, we have acted to ease the burden on motorists by £21.5 billion over the Parliament to 2015-16.

Fiona O'Donnell: Will the Minister clarify which party was in office when the fuel duty escalator was first introduced?

Sajid Javid: What I can clarify is that we are the party that abolished the fuel duty escalator—this Government abolished it, just as we have cut fuel duty. The hon. Lady rightly pointed out the cost-of-living pressures faced by her constituents, and made an accusation against the Government, but I noticed that she did not mention the fact that, during the last term of the previous Government, her constituents saw a huge rise in unemployment, which hit their ability to deal with cost-of-living pressures. Unemployment increased by 116% in her constituency during the last term of the previous Government, with an increase of 139% in youth unemployment—she is not in a position to talk about how she has helped her constituents.

Sheryll Murray: Can my hon. Friend refresh my memory? Was the Labour party not in government for 13 years? It could have abolished the fuel duty escalator at any time during that period.

Sajid Javid: My hon. Friend makes a good point again. On fuel duty, the Labour party’s only intention was to raise as much revenue as it could, without any regard for the effect on ordinary people and businesses up and down the country.

Fiona O'Donnell: Perhaps I can give the Minister an update from the latest unemployment statistics for East Lothian: long-term unemployment in my constituency is up 13% on the year, while long-term youth unemployment is sticking at the same level, which is hardly a record for him to be proud of.

Sajid Javid: Is the hon. Lady saying that she is proud of the record of the last five years of the Labour Government, when youth unemployment in her constituency went up by 139% and unemployment in general went up by 116%? When she talks about being proud of changes in unemployment, perhaps she should look at the record under her own Government.

Sheila Gilmore: Will the Minister acknowledge that what happened in 2008, not just in Britain but in the global economy, changed things dramatically? Until that time, of course, his own party had said that it was happy with and would stick to the amount that the Labour Government were spending.

Sajid Javid: The hon. Lady was perhaps not in the main Chamber today when I made my statement on RBS and bank reform. Her colleague, the Opposition spokesman, the hon. Member for Nottingham East, was there, so perhaps he has had an opportunity to relay some of my points to her. I had to remind the House of the contribution that the previous Government’s policy made to the deepest recession in this country’s post-war history.

Sheila Gilmore: I was not in the Chamber for the hon. Gentleman’s statement, which I regret. I would like to be able to divide myself in two in this place, or even three or four at times, but I presume he is referring to the question of regulation. I do not recall a single time during that period when Conservative politicians were calling for more regulation. Indeed, there were many times when they called for less—[ Interruption. ]

David Amess: Order. Although this is all good fun, I now ask the Minister to draw his remarks very closely to amendment 20.

Sajid Javid: May I respond briefly to the hon. Member for Edinburgh East? [ Interruption. ]

David Amess: Order. I have been very lax for the past five minutes, but I now ask the Minister to draw his remarks closely to amendment 20.

Sajid Javid: I will, Mr Amess. I will send the hon. Member for Edinburgh East a copy of the Hansard report of today’s debate, which will answer her question.
We have introduced a fair fuel stabiliser that ensures that fuel duty will increase by no more than inflation when oil prices are high. In this clause, we have completely scrapped two increases planned by the previous Government. As a result, to answer my hon. Friend the Member for South East Cornwall, fuel duty is 13p per litre lower than it would have been had we kept the plans that we inherited.
As a direct result of the Government’s action, fuel duty is forecast to fall over this Parliament by 11% in real terms. Had the Government implemented the measure, rates would have increased by 7%. It currently costs £7 less for a typical motorist to fill their tank. In total, over the past two years: a typical motorist will have saved approximately £170; a small business with a van will have saved £340; and a haulier will have saved approximately £5,200.
My hon. Friend the Member for Southport, who moved amendment 20, made his case eloquently and clearly. The amendment would result in increased fuel duty on road fuel gases such as compressed natural gas and liquefied petroleum gas; rates on all other fuels would be frozen. Some vehicles can be converted to run on road fuel gases, which have lower greenhouse gas emissions than petrol and diesel. In recognition of their lower emissions, compressed natural gas and LPG are taxed at reduced rates. The previous Government announced that, until 2014, the duty differential for compressed natural gas and biogas was to be maintained as the standard fuel duty rate increased. The differential for LPG, however, was to be reduced by the equivalent of 1p per litre each year, as LPG is not as environmentally friendly as compressed natural gas. Budget 2013 extends that policy to 2015-16 to provide further certainty to support the uptake of road fuel gases. Since the fuel duty cut in March 2011, duty on road fuel gases has been frozen as increases to the main rate of fuel duty have been cancelled.
It would be unfair and damage the uptake of road fuel gases if fuel duty were increased only on those fuels. In addition, the amendment would mean that producers of road fuel gases would have to pay fuel duty dating back to 2012. It is fair that all motorists benefit from the freeze in fuel duty and that we support the uptake of road fuel gases.

John Pugh: I thank the Minister for clarifying, and I will seek to withdraw the amendment. I know he supports the industry, but does he believe that it can see far enough ahead to make the key investment decisions it needs to make on LPG?

Sajid Javid: I accept my hon. Friend’s point: there is a need for some degree of certainty. However, I hope he will understand that the Government need to balance the provision of certainty with the ability to respond to economic and fiscal developments. We can provide a degree of certainty—the extension that I talked about provides that—but I hope he will take into account that there needs to be a certain degree of fiscal flexibility. I also thank him for confirming that, as he said earlier, the amendment is a probing one and he will not seek to press it to a vote.
Before I conclude, the hon. Member for Nottingham East raised the issue, which we all heard about recently in the news, of the allegations of oil market abuse. He rightly pointed out that those allegations are very worrying. He will probably be aware of the statement made by my right hon. Friend the Secretary of State for Energy and Climate Change; the allegations are being looked at and there is an inquiry, which will report back in due course and will take the allegations very seriously.
Fuel duty increased by over 20p per litre under the previous Government. Their plans would have increased pump prices by a further 18p per litre by the end of this Parliament. However, this Government are committed to supporting motorists. I therefore ask my hon. Friend to withdraw his amendment.

John Pugh: I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 177 ordered to stand part of the Bill.

Clause 178  - Rates of alcoholic liquor duties

Christopher Leslie: I beg to move amendment 107, in clause178,page106,line4,at end insert—
‘(2A) The Chancellor of the Exchequer shall within six months of the passing of this Act provide a report to Parliament on the differential impact of the increase in the rate of alcohol liquor duty under subsection (2) on—
(a) the level of UK sales in the Scotch whisky industry, and
(b) the level of employment in the Scotch whisky industry.’.

David Amess: With this it will be convenient to discuss clause stand part.

Christopher Leslie: The clause provides for increases in the rates of excise duties charged on spirits, wine and made-wine, and cider and perry, and for overall reductions in the rates of excise duty on beer, to have effect on or after 25 March 2013.
As members of the Committee will be aware, pubs and the beer industry have been calling for a cut in the beer duty for a while now. Members will also remember that the Opposition have long been calling for the Government to review the impact of the beer duty on the industry during these tough economic times. During proceedings on last year’s Finance Bill, my hon. Friend the Member for Easington (Grahame M. Morris) tabled an amendment calling for a review of the impact of the duty regime on the pub trade, which the then Economic Secretary—now at the Cabinet Office—opposed at the time. Again, in November 2012, the Opposition supported a motion in the Chamber calling for just such a review, a motion that the Government at that point rejected. We supported it because the beer duty escalator was hitting the pub and beer industry hard.
Brewing and pubs are a vital part of the UK economy, and 1 million jobs depend on them. Around 85% of pubs are small and medium-sized enterprises, and some 46% of those employed in the sector are aged between 16 and 24, so the industry is particularly relevant to youth employment as well. During the current economic difficulties, those small firms have been increasingly unable to absorb duty and other brewing cost increases. The Government’s decision to raise VAT to 20% alone increased the price of a pint by 5p; UK taxpayers now pay 40% of the EU beer tax bill while consuming only 13% of the beer. With household incomes falling, pub goers are becoming increasingly price sensitive. The effect of those pressures on the pub industry has seen, on average, 18 pubs shutting up shop in the UK every day and the loss of more than 5,000 jobs in 2011 alone.

James Duddridge: I ask this question with trepidation, having always been told never to ask a question I do not already know the answer to: the change on beer duty is a small and welcome one, but I genuinely cannot remember the last time there was any cut in beer duty. Can he remember?

Christopher Leslie: I cannot help to illuminate the historical quest that the hon. Gentleman is on. Perhaps we can both visit the House of Commons Library later to ask for advice—or even the Strangers Bar, afterwards. We will think about that one.
 James Duddridge  rose—

Christopher Leslie: Maybe the hon. Gentleman has had some inspiration.

James Duddridge: Alas, my inspiration is not quite as fast as the Minister’s is normally. Perhaps we could urge him to be inspired later on in the debate if he recollects, because he is a great intellect, has a great memory and I am sure that he has much greater resources than I do.

Christopher Leslie: Like the hon. Gentleman, I do not know the last time that duties on wine, spirits and Scotch whisky, or other forms of duty on alcohol, were changed. Again, maybe the Minister could tell us when they were last changed—in which particular year.
In general, however, it is important for the Government to recognise that this industry is one that needs support, and there is more that they can do to help it. We welcome the Government’s partial U-turn on the eve of the Opposition day debate that my hon. Friend the Member for Chesterfield (Toby Perkins) called for, during which he pushed for improved regulation of the pub industry. We were part of a broad coalition that called for a proper statutory code to support landlords, to protect local pubs and to help to turn around the rising tide of pub closures. So we welcome the fact that Ministers eventually decided to think again and accept that their self-regulatory model was not working in terms of establishing a fair relationship between the big pub companies and their landlords.
I have a question for the Minister on that point. I would be grateful if he could update the Committee on what stage the Government are at in bringing forward the proposals for the proper statutory code this year, which is obviously an issue that many hon. Members are concerned about. Can he also say what progress the Government are making to clamp down on alcohol duty fraud in this country, which is estimated to cost in the order of £1 billion a year? It would be useful if he could briefly allude to that point.
Regarding the amendment, which relates in particular to the Scotch whisky industry, the Minister will know that that industry is an incredibly important part of the economy, supporting 35,000 jobs across the UK, particularly in economically challenged parts of the country. He will also know that the decision on beer duty comes at the same time that the Government have introduced a 5.3% increase in spirits duty, which was obviously met with some disappointment by the Scotch whisky industry. The Scotch Whisky Association called it an
“unfair and incomprehensible blow to Scotch whisky.”
Sales of Scotch whisky in the UK have dropped in recent years, and the amount of duty is—I think—48% more than the duty that a beer drinker pays. There are a number of comparable issues that are worthy of further consideration. A report examining the differential impact of the increase in the rate of alcohol liquor duty, particularly looking at the UK level of sales in Scotch whisky and the level of employment in the Scotch whisky industry, would be very welcome indeed.
The purpose of our amendment is to probe the Government’s thinking in this area and it would be very helpful if the Minister could give us his thoughts and tell us what consideration he has given to the impact of these measures generally on the Scotch whisky industry. Has he taken time to meet representatives from that industry? If so, can he give us a sense of how he has taken their concerns into account in these proposals?

Brooks Newmark: I was not expecting to speak. Anybody who knows me knows that I am pretty much a notorious teetotaller; I do not really drink. However, I am here to represent my constituents.
First, this cut in beer duty is welcome. Anybody who represents a rural area will know that the pub industry in rural areas has been particularly hard hit, not only by past increases in alcohol duty but by the ban on smoking. I do not smoke either, but I believe in freedom of choice. However, I will not get into the debate about the rights and wrongs of allowing smoking in pubs now.
This important step change shows that the Government are not just supporting the beer industry, but are helping pubs, which are struggling throughout the country, especially in Essex, in my constituency of Braintree. I hope that this is the first of many Government cuts in beer duty to come in the years ahead.

Pamela Nash: I cannot claim that I am a teetotaller like the hon. Member for Braintree; I enjoy a whisky or two. That is one reason why I support amendment 107. I am proud of Scottish whisky, which is a success story for Scotland and Britain. Wherever Scots go in the world, they can see a bottle made somewhere near their own home, such as Old Pulteney, which is bottled in my constituency. I am disappointed and concerned that sales in the UK, which is the third biggest global market for whisky, have dropped 12% in the past five years, in part due to increased duty. The latest increase in the Finance Bill will not help at all.
The Scotch Whisky Association is quick to state that whisky drinkers pay 48% more duty on their drink than beer drinkers. That is not to say that I do not support the measure on beer. I welcome any support for pubs at the moment, including the 1p cut in the price of a pint, however small a help that is.
I was a member of the Finance Bill Committee in 2011 and I remember the then Exchequer Secretary being proud of what her Government were doing in raising duty on high-strength beers, while simultaneously bringing down duty on low-strength beers, in an attempt to encourage people to reduce the strength of the beer they were drinking.

Brooks Newmark: I am enjoying what the hon. Lady is saying. Again, although I am not an alcohol expert, I am aware of fake substitutes going around. Other countries are calling whisky “Scotch” when it is not Scotch. To help the Scotch industry in Scotland, perhaps the Government—I hope that the Minister is listening—can go more vigorously after eastern European countries in particular, which I will not name, that tend to brand whisky as Scotch, when it may be made in Poland. To protect the brand name and help support the Scotch industry in Scotland, which is unique and special, we can go after those countries and companies that do not label whisky clearly as not being Scotch when it is not.

Pamela Nash: I welcome the hon. Gentleman’s intervention. I would fully support that and anything that the Government can do to protect Scotch whisky as a brand. Such legislation is determined at EU level and Members of the European Parliament are already fighting for that cause. I would be pleased if the UK Government were supporting them.

Fiona O'Donnell: My hon. Friend is making a powerful speech in support of the Scotch whisky industry. She almost answered the point that I was going to raise. It is important that the Government do not act alone. We need co-operation at European level, which is why the Scotch Whisky Association is engaging on this matter and recently attended a conference in Rome, to press the case against food and drink fraud.

Pamela Nash: Yes, we need co-ordination and co-operation across Europe and globally on this issue. We have huge emerging markets for Scotch whisky in India and China, and still a large market in the United States, which I hope that the Government will support and facilitate.
In 2011, I agreed with the Government’s argument that high-strength beers posed a particular problem for problem drinkers, particularly those who are alcohol-dependent. The “1p off a pint of beer” headline has been great for the Government in recent weeks, I have to admit. However, I think that it has had the unintended consequence—I hope that it is unintended—of reducing the overall duty on high-strength beer, a change that only two years ago the Government were pushing against. My understanding from the figures that we have is that the total duty for high-strength beer will now be reduced by 0.75%. Will the Minister tell us whether the Government are still committed to increasing taxes on high-strength beer and discouraging those drinking high-strength beer by using taxation to persuade them to drink lower-strength drinks?

Marcus Jones: The right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) is rarely in this House these days, but the amendment seems to have his fingerprints all over it; it is a continuation of the policy he pursued when he was Chancellor.
We must put the matter in perspective. During that time, if I recall correctly, rarely, if at all, was Scotch whisky touched by increases in duty. It is absolutely telling that when someone goes into a supermarket now to buy a bottle of whisky, it is not that much more expensive, in relative terms, than it was 20 years ago. We need to look at the issue extremely carefully and weigh the situation up, particularly if we compare whisky with a product that is far lower in strength—beer.
We talk about health a lot in this place. The Opposition were talking a lot about smoking prevalence and the health issues related to that this morning at questions to the Leader of the House. There are obviously many health issues related to drinking. If we ask whether we should prioritise having a better tax regime for Scotch whisky over one for lower-strength products such as beer, I think beer would win out every time, because it is a lower-strength product. While, like everything, it needs to be drunk in moderation, it is generally better for people.
I congratulate my hon. Friend the Economic Secretary and his colleagues in the Treasury on dispensing with the beer duty escalator, as it was destroying the beer and pub industry in this country. Beer duty has increased by 42% since the escalator was implemented by the Opposition in 2009. Dozens of pubs were closing every month and thousands of jobs were being lost. It is likely that many more thousands of jobs would have been lost from the industry if we had kept pursuing that policy.
The Opposition have often criticised the fact that the beer duty has been reduced by only 1p. However, I think that it is the first time that beer duty has been reduced since the 1950s. The removal of the beer duty escalator is a symbolic sign for the beer and pub industry. I was speaking to some people from that industry last night. They told me that it has breathed new life into the industry and instilled new confidence in companies involved to invest in their pub estate, the industry and great new jobs. My hon. Friend the Economic Secretary and his colleagues have pulled a masterstroke, which I know my local CAMRA members are extremely happy with. I am going to join them in a beer festival in a couple of weeks—[Interruption.] The hon. Member for Islwyn is absolutely welcome to Nuneaton’s beer festival. I am sure that the people there will be absolutely delighted, and I will join them in a celebratory pint in a couple of weeks.

Fiona O'Donnell: I hope that the drop in beer duty will make a difference to the future of the pub industry, particularly in rural areas such as mine, which may have lost their community hall, meaning that the pub is absolutely the centre of the community. It is a meeting place for people moving into the area and it prevents social isolation. I hope that the change makes a difference and that the Treasury keeps an eye on it and talks to the Department for Business, Innovation and Skills to see whether it is making a difference.
One of the biggest challenges the pub industry is facing —I am sure CAMRA would agree with me—is the contracts it enters into with some of the pubcos. It will be interesting to see whether the pubcos pass on the drop in duty to their customers. I very much hope that we will see some transparency for the many pub owners who are struggling to make ends meet. Many of them have to resort to tax credits, which seems incredible. The industry used to enable people to earn a healthy living.
I want to talk about the increase in the duty on spirits and the Scotch whisky industry. I have a distillery called Glenkinchie in my constituency, on the outskirts of the village where I live. I know that we Scots often look and sound parochial, and maybe we sometimes are a little, but Scotland’s export markets are narrower for the food and drink sector. Salmon and whisky outshine all other produce, and I recommend both to anyone following this debate.
Has the Minister considered the impact that the duty increase will have on the Scottish economy? Some island communities have few options for employment other than the Scotch whisky industry. I promise I did not partake of any whisky before I spoke this afternoon; I must confess that I do not like whisky. When I last visited Islay—it is a beautiful island—I think it had six operating distilleries, and whisky is vital there, not only in terms of the jobs within the distilleries, but in terms of the supply chain and the tourist industry. So many people rely on it. My family was reliant on the Scotch whisky industry for 15 years to keep my children in shoes and school bags.

Rory Stewart: The hon. Lady is making a good speech, and is it not partly an argument for why it is important for Scotland to remain in the United Kingdom? Scotland has had great success in specialising brilliantly in various things, from oil through to whisky and salmon. The Union offers the diversification, breadth and security of belonging to an economy that contains many other elements that can complement Scotland’s specialities.

Fiona O'Donnell: I am very grateful to the hon. Gentleman for his intervention. As he often does, he speaks with such sense and tolerance on the issue. He makes the case that we are better together and that Scotland is better able to promote itself and grow its industries in the Union. Of course, England is a major exporter for Scotland. Why would we erect a barrier between Scotland and our biggest market and let that interfere with the prosperity of our country? I absolutely agree with him.

Pamela Nash: On that point, 80% of UK whisky sales take place south of the non-existing border. I will stop using that phrase in the lead-up to the referendum campaign. Even though there could be a strong effect on the producers of Scotch whisky in Scotland, the rise in duty will also affect those selling whisky throughout the rest of the United Kingdom.

Fiona O'Donnell: I am surprised; I know my hon. Friend quite well, but I had no idea her knowledge of the whisky industry was so extensive. I will have to catch up with her later to find out when she has had the opportunity to conduct that research.
It is absolutely clear that the rise in duty will impact on sales for Scotland in the rest of the United Kingdom. The hon. Member for Nuneaton spoke about how the duty on Scotch whisky does not appear to have increased so much comparatively in recent years. Indeed, there are many own label brands that are cheaper. It is not so cheap in this place, however.

John Pugh: Perhaps the hon. Lady can help me with my lack of knowledge on the Scotch whisky industry. What percentage of Scottish whisky is exported and therefore not subject to this duty?

Fiona O'Donnell: I would like to refer to my notes, because I am not exactly clear what percentage is exported, but my hon. Friend the Member for Airdrie and Shotts said that 80% comes to England, so if we add on however much we consume in Scotland—I am sure it is not a great deal—it is a significant proportion in terms of Scotland’s balance of payments, and its ability, willingness and enthusiasm to contribute to the rest of the UK’s balance of payments. It is a significant factor.
My understanding from the last Scotch Whisky Association’s figures is that the quantity was going down, but that more premium brands were being exported because in countries such as China it is prestigious to have a bottle of Scotch whisky, especially one of the premium brands. I will not mention any of them, apart from Glenkinchie which is produced in my constituency.

Stephen Doughty: My hon. Friend is making a strong and eloquent case with my other hon. Friends. Is she aware that whisky is also distilled in Wales by the top independent distiller, Penderyn? I have a constituency interest because its wash or wort comes from Brains Brewery in my constituency. I would be interested to know the Minister’s views on the impact on the Welsh whisky industry as well as the Scotch industry, which is much larger.

Fiona O'Donnell: I am grateful for my hon. Friend’s intervention. It may be whisky, but it is not Scotch whisky, and that is the distinction. The Irish also produce their own whiskey. The answer to the hon. Member’s question about exports is that in the five years to 2012, the volume of Scotch whisky exported increased by 10% from 1.1 billion to 1.2 billion bottles a year. The volume of UK sales declined between 2007 and 2013 from 102 million 70 cl bottles to 90 million, which is considerable.
The industry is doing well and Scotland is incredibly proud, but I hope that the Minister—perhaps he will pay attention—will talk to the sector about the likely impact. Will he tell us what discussions he has had, subject to the announcement in the Budget, with the Scottish Government, the Scotch Whisky Association, particularly with regard to the island communities, which will be particularly concerned? They are fragile communities and precious to the diversity of the UK. We want them to have a healthy future. All we are asking—it is becoming clear over the weeks and months that this all we can ever ask—is that the matter will be reviewed so that we are absolutely clear about the impact and that it does not inadvertently harm the great relationship between Scotland, the rest of the UK, and those communities in Scotland that depend on this industry.

Sheryll Murray: It is a pleasure to follow the hon. Lady. I am surprised by the amendment, which prompts the question: does the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) still have influence on Labour party policy? The amendment specifically mentions Scotch whisky but, as we have heard, we have other whisky production companies in Wales and in England—the English Whisky Company—so perhaps the amendment shows a little favouritism.

Fiona O'Donnell: Perhaps I could point out to the hon. Lady that there are several forms of pasty, but that did not prevent me from welcoming the U-turn on Cornish pasties recently.

Sheryll Murray: I know I am straying, Mr Amess, and I apologise, but it was a pasty tax, not a Cornish pasty tax. There was no discrimination.
I want to highlight the words of my constituent, Mr James Staughton, the managing director of St Austell Brewery, who said:
“By deciding to freeze the tax on beer through the removal of the beer duty escalator—and then going even further by lowering duty by 1p a pint—”—
the Chancellor—
“has moved to boost jobs in pubs, and in a way that will not hit the Treasury’s bottom line. It is a boost for pub goers and recognises the government’s support for local community pubs and brewing; a key UK manufacturing sector. It will allow the industry to invest, save 2,000 jobs in this year alone, create new jobs, and contribute to economic growth.”
I want to make a clear distinction. Although Mr Staughton has tied tenants in many of his pubs, he is not in the same league as the national pubcos, as previously mentioned, and he does look after his tenants. One of his beers is called Tribute, and I would like to pay tribute to my constituent and also to the Minister for his announcement.

Chris Evans: Thank you, Mr Amess. [ Interruption. ] I did say it right. It is my accent. I thought, when I complimented you earlier, you would call me earlier. I shall try again. You are a wonderful Chairman, Mr Amess. It is a pleasure to serve under your chairmanship.
On hearing the hon. Member for Braintree—I did not think that I would ever think this in the House of Commons—an Adam Ant song came to mind: “Goody Two Shoes”. The hon. Gentleman don’t drink, don’t smoke. Well, what does he do?
I am slightly embarrassed to speak, having heard the lilting accents of my hon. Friend the Member for Airdrie and Shotts and the hon. Member for Nuneaton. When I was younger, I worked in the betting industry. There is a similarity in the way in which the betting and pub industries are treated. The betting industry is often treated as a purveyor of anti-social behaviour that somehow drags people in and corrupts them. It sometimes feels the same way when we talk about the pub industry. Sometimes people do not want to go to the pub, because they believe that trouble spills out. I have some sympathy with the idea of minimum alcohol pricing and I am disappointed that that was not included in the Queen’s Speech. I hope that the Government will revisit that decision and look at other ways to stamp out anti-social behaviour.
When I look at the Government’s plans for raising duty on high-strength lagers while bringing it down for beer, I think that in some ways it is misguided. I have come to that decision because, if I go into the pub, which I do sometimes––very rarely––I notice that, while I am sipping an orange juice or a lemonade, or sometimes I will push the boat out and have a pint of Coke—

Stephen Williams: With ice?

Chris Evans: With ice, of course, and a slice of lemon. Sometimes, if I am really feeling in the mood and it is a special night, I will put a slice of lime in there as well.

Fiona O'Donnell: Before my hon. Friend descends any more, forgets the valleys and becomes a real city slicker, when he talks about fairness, does he understand that whisky drinkers are now paying 48% more duty than beer drinkers? Although I wish the beer industry a healthy future, there is a sense of a lack of fairness on this issue.

Chris Evans: If my hon. Friend had allowed me, I would have developed that argument further. I was making a general point that most pubs that people go into, especially the pubco sort of pubs that we see springing up, are not serving the traditional ales. In all honesty, the only place that I have ever seen traditional ale is downstairs in the Strangers bar. We have sometimes seen Tribute on the tap, and also S.A. Brains, the beer of Wales—I will not call it by its colloquial name. I think that the problem is that most people are drinking strong lagers.
However, I do not think that the issue is the problems that we have seen with pubs. I feel sad when I walk down the street and see a pub I remember from when I was young boarded up. Nobody seems to want to take on the tenancies any more. The reason why pubs are failing is more complicated than simply taxation. I welcome the duty reduction on beer, mostly because it is mainly micro-breweries and small breweries that produce those beers. It will enable them to compete in some way against the bigger brewers such as Heineken or Tennent’s.
I come to the amendment. I will tell a little story about whisky that a Member related to me when I first came to the House. He said that the chairman of his Labour party asked him for a bottle of House of Commons whisky to raffle for the Labour party. He said, “I will do that.” He had just taken over as the MP a month earlier, and when he handed the bottle over, the chairman said, “Oh they are making proper sizes now. They have been miniatures for years.” A frugal MP there.
We cannot deny that the Scottish whisky industry creates 35,000 jobs across the UK, but it is facing a particularly tough time. The price of whisky has gone up by 47p—a jump from £12.42 a bottle to £12.89. That is a 5.3% increase. The problem drinkers are not whisky drinkers or spirit drinkers. The people who have problems with antisocial behaviour are usually tanked up with six or seven pints of high-strength lager, and go out looking for a fight. The whisky industry supports people. As my hon. Friend the Member for East Lothian said, it supports people in the highlands and it supports small communities. The Government have talked enough about an export-led recovery. Well, Scottish whisky is export-led.

Fiona O'Donnell: Will my hon. Friend give way?

Stephen Williams: Will the hon. Gentleman give way?

Chris Evans: Who will I pick? I will come back to the hon. Gentleman.

Fiona O'Donnell: Will my hon. Friend also speak about the benefit to the UK economy, because a quarter of UK food and drink exports is the Scotch whisky market?

Chris Evans: That is the point. I do not like saying this—my hon. Friend the Member for Cardiff South and Penarth will not like it—but although Penderyn whisky is quickly becoming the whisky of Wales, it is Scotch whisky that most people want. When people want a prize, they ask for House of Commons Scotch whisky, not Penderyn whisky, which is served in the Welsh Assembly. There is a lesson to be learned by us Welsh and people from regions such as Cornwall from how the Scottish nation has managed to export its culture in terms of whisky, the food it produces and other things as well.

Stephen Williams: My friend, the hon. Member for Islwyn, has dealt with the point I was going to make. I was getting a bit tired of him referring to Scottish whisky, and I thought he ought to be referring to Welsh whisky, in particular Penderyn. But I have not yet heard him say which valley Penderyn whisky is made in, and I wonder why that is.

Chris Evans: I am not going to indulge the hon. Gentleman. He knows very well where Penderyn whisky is made.

Stephen Williams: The hon. Gentleman has forgotten his roots.

Chris Evans: I have not forgotten my roots, sir. Some of us stayed and fought for seats in the valleys and fought for the people we grew up with, and did not bother wandering off to Bristol. I did go to the south-west once. I did not like it much, and they did not like me much.
The point I am trying to make is that with UK sales falling, and total tax, including VAT and excise duty, now accounting for 80% of the price of a bottle of Scotch whisky, this duty really needs to be reviewed. It would be a tragedy if we lost an industry simply because of a tax regime. I will say that Government have made progress in reducing the duty on beer. That has to be welcomed, especially for small breweries. But this is a draconian measure that needs to be reviewed.
My final point, which my hon. Friend and the hon. Member for Braintree touched on, is that there is a lot of fake whisky around. A lot of people are importing and selling what they term “Scotch” when it is nothing of the sort. It is important that the Minister has a review so that we can tackle fraud, not only for whisky, but for alcoholic drinks such as vodka and other spirits.

Brooks Newmark: On that point—perhaps I denigrated my friends in eastern Europe more than I should have—one of the biggest potential export markets for Scotch, and where I know a lot of branding of Scotch takes place, is China. The Chinese create their own blend, which they market and sell at prices well below real Scotch whisky, yet they brand that as Scotch and sell it to people in China. With a rising middle class in China, and with China wanting to become part of the World Trade Organisation, it is important that we get the message to the Chinese that they had better ensure that they have clear labelling on products such as Scotch whisky.

Chris Evans: The hon. Gentleman mentions the problem with Scotch whisky. If I may digress a little, I have a large packaging manufacturer in my constituency that is having a problem with different blends and fibres of paper being imported from China. Although that is not quite the same thing, he has hit the nail on the head: if China really wants to become part of the global economic community, that behaviour needs to be stamped out. However, for that to happen there needs to be some sort of level playing field. When the Minister responds, I hope that he will take on board the idea of a review, because that is so important for such a small-scale industry.

Steven Baker: Despair is the conclusion of fools. If Disraeli, who is associated with my constituency, had not come up with that aphorism, I might well despair at the course of this debate and the previous one for a number of reasons.
First, when I look at the explanatory notes, I tend towards despair—of course, I do not wish to despair—when I see the level of interventionism we have in relation to taxes on different kinds of drinks. Really, to be setting out different rates for high-strength beer, low-strength beer and sparkling cider versus still cider makes me ask what right do politicians have to intervene to that extent in people’s lives?
Secondly, it seems as though we are trying to pick up pennies in front of a steamroller. For the public, we are talking plus or minus a few pence on a pint. Overall, the total duties on alcohol in 2013-14 are due to raise £10 billion, with £2.9 billion from spirits, £3.6 billion from wine and £3.5 billion from beer and cider. However, total managed expenditure is expected to be £720 billion. To put that in context, the defence budget is £40 billion, so it turns out that drinkers are paying for about a quarter of the defence budget. I regret that I did not catch your eye in the previous debate, Mr Amess, because on a related note I might have pointed out that fuel duty was raising £5 billion a year more than the transport budget.
That brings me on to the third reason why I am grateful to Disraeli for my avoiding despair: the absurdity of all this is that we have the public paying for health, welfare, education and debt interest, which is 74% of Government spending, by going to the pumps and going to the pub. We have ended up with the poor paying for the services that they receive. There is an old lie that the rich will pay, but it turns out that it is the poor who will pay.
When I look at this debate on alcohol duty and I hear Members from both sides, but particularly Opposition Members, talk about the damage that tax does, it makes me think that it is time that we revisited some of our assumptions. If we know that tax is damaging, and we know that the poor are paying these taxes, it is time to start thinking seriously about the harm that the state is doing to ordinary people.

Sajid Javid: The clause makes changes to alcohol duties with effect from 25 March 2013. It cuts general beer duty by 2% to help support pubs; the overall tax on an average pint will fall by 1p. It also increases the duty on cider, wine and spirits by 2% above inflation.
The Government inherited a policy to raise all alcohol duties by 2% above inflation until 2014-15; the previous Administration included those receipts in the public finances before the revenue had been received. Given the state of the public finances, it was not possible to reduce all alcohol duties at the Budget. Therefore, we decided not to make any changes to the policy that we inherited for cider, wine and spirits.
The clause adds 1p to a pint of cider, but the duty on an average pint of cider remains at about half that of an average pint of beer. This Government reversed at the June 2010 Budget the previous Administration’s significant real increases in cider duty. The clause adds 12p to the price of a bottle of wine. In keeping with EU law, duty on average-strength wine and beer will continue to be broadly similar. The average strength of wine has increased in recent years, so wine duty has increased by less than beer duty on a per unit of alcohol basis. The clause also adds 46p to a bottle of spirits. However, more than 90% of Scotch whisky is exported and unaffected by the duty regime.

Fiona O'Donnell: I got a slight fright there when I thought the Minister talked about a duty on innkeeping, then I realised it was in keeping. This is not just about whisky manufacturers, it is about whisky drinkers in this country. Does the Minister understand that there is a sense of unfairness that their favourite tipple is being taxed so much more heavily than beer?

Sajid Javid: I assure the hon. Lady that the Government are not proposing a tax on innkeeping. I listened carefully to her both now and earlier. I will turn to Scotch in a moment. It is best to start with some comments on amendment 107.
The amendment would require the Government to publish a report on the impact of alcohol duties on the Scotch whisky industry. The Government keep all taxes under review and regularly monitor the impact of all alcohol duty rates on consumers and producers. We will continue to do that, and so believe that the amendment is unnecessary and I ask the hon. Member for Nottingham East to withdraw it. However, I understand the shared desire of the Committee to have a successful Scotch whisky industry, as we heard from the hon. Members for Airdrie and Shotts, for East Lothian and for Islwyn. That is why, as part of the UKTI support, Scotch whisky will shortly feature as one of the first products in the great food and drink campaign. That will give whisky a high visibility internationally in key markets. HMRC has taken on the role of verification authority for Scotch whisky to assess the quality of the product and its protection from adulteration.
It is worth emphasising again that 90% of Scotch whisky is exported. I was asked about the matter earlier in debate. Given that exports are not subject to the UK duty regime—they are duty-free—they will be completely unaffected by any changes in spirits duties.

Pamela Nash: Does the Minister not think it is damaging to the brand of Scotch whisky that in the past five years sales have gone down across the UK from 102 million to 90 million bottles a year? I think that is partly due to the cost and increase in tax. Why would we sell a product to other countries that we are not drinking ourselves any more because of the cost?

Sajid Javid: Despite what the hon. Lady says, it is fair to say that we clearly are still drinking a large amount of whisky. I think she herself mentioned earlier that the UK remains the third largest single market for Scotch whisky, which is a considerably important market for the UK.
I also hope the hon. Lady will agree that although, as was rightly pointed out, spirits duties on a per unit basis are generally higher than those on beer and wine, it is true throughout the EU, so that most of our neighbouring EU countries have the same policy. If one looks on a per ratio basis—the ratio of beer duty to spirits duty—our ratio is one of the lowest. It is interesting to note, as I did when I researched the subject and looked into changes that we might make in the Budget, that during the 13 years Labour was in office, spirits duty on a per unit basis rose, on average, a lot less than beer duty. To put it another way, beer duty was rising at a faster rate, on a per unit basis, than Scotch. I wonder why; I am sure that it had nothing to do with the then Chancellor or Prime Minister.
It is also important to point out that the plans that the Government have implemented on spirits are no different from those that it inherited from the previous Government. The hon. Member for Airdrie and Shotts will know that the changes to spirits duty were planned by the previous Labour Government. Lastly on whisky, my hon. Friend the Member for Braintree raised the important question of protecting the designation of “Scotch” whisky. Scotch whisky is a geographically protected product, and HMRC is working with the Scotch whisky industry on the verification regime. The Scotch whisky industry welcomes the plans, which will help to protect its rightly high reputation.

Fiona O'Donnell: The Minister said that the previous Labour Government had planned such an increase in due course. Does he acknowledge the fact that the previous Government, which had planned to increase duty on whisky, listened to the industry and froze it instead?

Sajid Javid: The hon. Lady makes an important point. She also knows that the revenue raised by alcohol duty—as we heard earlier, it is billions of pounds—is important for funding government services, so we need to keep an eye on the impact that duty changes have on revenues. The Government decided that a change in duty, where we could afford one, would be best focused on beer and the pub industry more generally.
It is to that topic that I now turn. Community pubs are important. They play an important role in community life across the country, and they encourage responsible alcohol consumption. It is, therefore, a sad fact that 10,000 pubs have closed in the past decade. The Government are committed to supporting pubs. Pubs are benefiting from the changes that we have made to business tax, including the reduction in the main rate and the small profits rate of that tax. Regulatory changes have made it easier for pubs to play live music. However, the Government wanted to provide additional support, so we are making a targeted reduction in beer duty, because that will benefit pubs the most. The British Beer and Pub Association estimates that 68% of alcohol sold in pubs is beer. It was also announced at the Budget that the beer duty escalator will end, so beer duty will rise only by inflation next year.
The hon. Member for Nottingham East mentioned the current consultation on pubs. It is important and I am glad that the Government have initiated it. When the consultation ends, the Secretary of State for Business, Innovation and Skills will report back on its results.
Clause 178 reduces the beer duty rate by 2% from 25 March 2013, which is equivalent to reducing the tax on an average-strength pint of beer by 1p. To answer the question of my hon. Friend the Member for Rochford and Southend East, it is the first cut in beer duty since 1973. I am sure that the Committee will be interested to hear that the 1973 cut was also made by a Conservative Government. Compared with the previous Administration’s policy, beer will be 4p a pint lower and its consumption will be 2.2% higher this year.
The reduction in beer duty has been welcomed. Mike Benner, chief executive of CAMRA, said:
“What could have been the final nail in the coffin for our pubs has been decisively avoided by the Chancellor in a move that will spark celebration in pubs across the UK.”
I note the welcome in the debate from my hon. Friends the Members for Braintree, for Nuneaton and for South East Cornwall, and the hon. Member for East Lothian. It has also been welcomed by local brewers, and the Tatton brewery in the Chancellor of the Exchequer’s constituency has issued a celebratory pint called Pennies from 11, which is available in Strangers Bar; next week, importantly, it will be serving Sajid’s Choice from Bird’s brewery of Bromsgrove, which I warmly welcome. I invite you, Mr Amess, and all members of the Committee—I mean all, including Opposition hon. Members—to join me for a celebratory point.

Christopher Leslie: That is a generous offer. Will the Minister shout a round for the whole Committee?

Sajid Javid: I should not say so, but I will—I am happy to buy a round. It is rare to get a beer named for oneself, after a policy we have implemented, but when Opposition Members drink that beer they will be celebrating not only the cut in beer duty, but the Government’s economic policy.

Pamela Nash: I thank the Minister for the offer of a drink for the entire Committee, and I will buy him a whisky in return. I made a specific point in my comments earlier about high-strength beer. Can he address why high-strength beer has been included in the duty drop?

Sajid Javid: I thank the hon. Lady for her offer, which is most welcome. I was about to move on to her point. In addition to the general beer duty rate, there are also additional beer duty rates for high and low-strength beer. In order to reduce the tax on a typical pint of low-strength beer by 1p, the duty strength on low-strength beer is being reduced by 6%. Duty on high-strength beer has two parts: general beer duty and an additional high-strength beer duty. The additional high-strength beer duty is increasing by 4.3%, which partly offsets some of the 2% reduction in general beer duty. The overall duty on high-strength beer therefore falls by 0.75%—so it is falling overall—reducing the duty on a typical pint of high-strength beer by 1p.

Pamela Nash: That is the exactly my point. In 2011, the Government were passionate about how they were putting extra duty on high-strength beer to discourage people from drinking it. I understand that the duty is in two parts, but the overall duty is now dropping, which is the opposite to what was announced with great flurry in 2011.

Sajid Javid: I can answer the hon. Lady’s question. The overall beer duty for high-strength beer forms two parts, one component being the standard beer duty. The two things are connected. When we changed standard beer duty, that had an impact on high-strength beer, but the other component we changed reduced the amount of reduction that would have taken place otherwise. To have done anything else would have unnecessarily complicated our duty regime, so we felt that our action was the appropriate course.
In conclusion, the clause implements the pre-announced increases in cider, wine and spirit duties that we inherited from the previous Administration. Through prioritisation and taking difficult decisions elsewhere, however, Budget 2013 was able to announce an end to the beer duty escalator to support pubs. The clause goes further by reducing the tax on an average pint by 1p, the first cut in more than half a century.

Christopher Leslie: Given that we have had a useful debate to probe the Government’s thinking on many of the issues, in particular those involving the Scotch whisky industry, and especially as we have managed to extract a concession—that the Minister will buy a pint for the entire Committee—I am happy to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 178 ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned.— (Greg Hands.)

Adjourned till Tuesday 18 June at ten past Nine o’clock.